BOC 2014 - Mercantile Law Reviewer.pdf

TABLE OF CONTENTS

TABLE OF CONTENTS

TABLE OF CONTENTS

TABLE OF CONTENTS

TABLE OF CONTENTS

LETTERS OF CREDIT

Remedies Available.................8

Definition and Nature .............. 1

Warehouseman’s Lien .............8

DEFINITION ...................................... 1 PURPOSE .......................................... 1 ESSENTIAL REQUISITES ................... 1 NATURE ............................................ 1 DURATION OF LETTERS OF CREDIT.. 1 TYPES OF LETTERS OF CREDIT ......... 2

NEGOTIABLE INSTRUMENTS LAW Definition................................. 11

Parties to a Letter of Credit .... 2

Forms and Interpretation....... 11

RIGHTS AND OBLIGATIONS OF THE PARTIES ........................................... 2

Kinds of Negotiable Instruments............................ 16

Basic Principles of Letter of Credit .................... 3

PROMISSORY NOTE ........................ 16 BILL OF EXCHANGE ......................... 16

DOCTRINE OF INDEPENDENCE ........ 3 FRAUD EXCEPTION PRINCIPLE ........ 3 DOCTRINE OF STRICT COMPLIANCE 4

Completion and Delivery .......17 INSERTION OF DATE ....................... 18 EFFECT OF ANTE-DATING AND POSTDATING ........................................... 18 COMPLETION OF BLANKS .............. 18 INCOMPLETE AND UNDELIVERED INSTRUMENTS ............................... 18 COMPLETE AND UNDELIVERED INSTRUMENTS ............................... 18 INCOMPLETE AND DELIVERED INSTRUMENTS ............................... 19

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

Signature................................ 19 SIGNING IN TRADE NAME .............. 20 SIGNATURE OF AGENT .................. 20 INDORSEMENT BY MINOR OR CORPORATION .............................. 20 FORGERY ....................................... 20

Rights of the Entruster ........... 6 VALIDITY OF THE SECURITY INTEREST AS AGAINST THE CREDITORS OF THE ENTRUSTEE/ INNOCENT PURCHASERS FOR VALUE .......................................................... 7

Consideration.........................23 Accommodation Party ......... 24

Obligation and Liability of the Entrustee ....................... 7

LIABILITY ....................................... 24

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ACCOMMODATION PARTY AS SURETY...........................................24

EFFECT OF MATERIAL ALTERATION ........................................................38

Negotiation ............................ 24

Acceptance ........................... 38

NEGOTIATION DISTINGUISHED FROM ASSIGNMENT .......................25 MODES OF NEGOTIATION ...............25

DEFINITION ....................................38 MANNER .........................................38 TIME FOR ACCEPTANCE .................39 RULES GOVERNING ACCEPTANCE .39

Rights of the Holder..............28

Presentment for Acceptance ...................... 40

Liabilities of Parties ............... 33 PARTIES PRIMARILY LIABLE .......... 33 PARTIES SECONDARILY LIABLE ..... 33

WHEN PRESENTMENT FOR ACCEPTANCE NECESSARY ............ 40 WHEN PRESENTMENT FOR ACCEPTANCE EXCUSED ................ 40 TIME/PLACE/MANNER OF PRESENTMENT ............................... 41 EFFECT OF FAILURE TO MAKE PRESENTMENT ............................... 41 DISHONOR BY NON-ACCEPTANCE . 41

Warranties ............................. 34 Presentment for Payment .... 34 Notice of Dishonor ................ 35 PARTIES TO BE NOTIFIED ............... 36 PARTIES WHO MAY GIVE NOTICE OF DISHONOR ..................................... 36 EFFECT OF NOTICE ......................... 36 FORM OF NOTICE............................ 36 WAIVER .......................................... 36 DISPENSATION WITH NOTICE ........ 37 EFFECT OF FAILURE TO GIVE NOTICE ........................................................ 37

Promissory Notes .................. 41 Checks ................................... 42 DEFINITION ................................... 42 KINDS ............................................ 42 PRESENTMENT FOR PAYMENT ......43

Discharge of Negotiable Instrument ......... 37

INSURANCE CODE Concept of Insurance ........... 45

DISCHARGE OF NEGOTIABLE INSTRUMENT ................................. 37 DISCHARGE OF PARTIES SECONDARILY LIABLE .................... 37 RIGHT OF PARTY WHO DISCHARGED INSTRUMENT ................................. 37 RENUNCIATION BY HOLDER .......... 37

CONTRACT OF INSURACE .............. 45 DOING OR TRANSACTING AN INSURANCE BUSINESS ............ 45

Elements of an Insurance Contract .................................47

Material Alteration ................ 38

Characteristics/Nature of Insurance Contracts ......... 48

CONCEPT ........................................ 38

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Classes ...................................49

Claims Settlement and Subrogation.....................71

MARINE ......................................... 49 FIRE ................................................ 53 CASUALTY ..................................... 54 SURETYSHIP ...................................55 LIFE.................................................55 COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE .................................... 57

CONCEPT OF LOSS .......................... 71 CAUSES OF LOSS ............................ 71 NOTICE AND PROOF OF LOSS ......... 71 GUIDELINES ON CLAIMS SETTLEMENT .................................. 72

Insurance Commissioner ......75 JURISDICTION AND ADJUDICATORY POWERS ......................................... 75 REVOCATION OF CERTIFICATE OF AUTHORITY .................................... 75 LIQUIDATION OF INSURANCE COMPANY ....................................... 75

Insurable Interest .................. 57 IN GENERAL.................................... 57 WHEN INSURABLE INTEREST SHOULD EXIST ............................... 58 CHANGE OF INTEREST ................... 58 IN LIFE/HEALTH INSURANCE ........ 58 IN PROPERTY INSURANCE ............ 60 DOUBLE INSURANCE AND OVER INSURANCE .................................... 62 MULTIPLE OR SEVERAL INTERESTS ON SAME PROPERTY ...................... 63

TRANSPORTATION LAWS Common Carriers .................. 77

Perfection of the Contract of Insurance ...........................64

CONCEPT ........................................ 77 DILIGENCE REQUIRED OF COMMON CARRIERS ....................................... 78 LIABILITIES ..................................... 79

OFFER AND ACCEPTANCE/CONSENSUAL ........ 64 PREMIUM PAYMENT ..................... 64 NON-DEFAULT OPTIONS IN LIFE INSURANCE ....................................65 REINSTATEMENT OF A LAPSED POLICY OF LIFE INSURANCE .......................66 REFUND OF PREMIUMS..................66

Vigilance Over Goods ............79 LIABILITY IN GENERAL ................... 79 EXEMPTING CAUSES ...................... 79 CONTRIBUTORY NEGLIGENCE........ 81 DURATION OF LIABILITY................. 81 STIPULATION FOR LIMITATION OF LIABILITY ....................................... 82 LIABILITY FOR BAGGAGE OF PASSENGERS ................................ 84

Rescission of Insurance Contracts ............................... 67 CONCEALMENT .............................. 67 MISREPRESENTATION/OMISSIONS ....................................................... 68 BREACH OF WARRANTIES .............. 70

Safety of Passengers ............ 85 LIABILITY IN GENERAL .................. 85 VOID STIPULATIONS...................... 85 DURATION OF LIABILITY................ 85 LIABILITY FOR ACTS OF OTHERS ... 86

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EXTENT OF LIABILITY FOR DAMAGES ....................................................... 88

Corporate Juridical Personality ........................... 107

Bill of Lading .........................89

DOCTRINE OF SEPARATE JURIDICAL PERSONALITY............................... 107 DOCTRINE OF PIERCING THE CORPORATE VEIL ......................... 107

DEFINITION ................................... 89 THREE-FOLD CHARACTER ............ 89 DELIVERY OF GOODS ..................... 89 PERIOD FOR FILING CLAIMS .......... 90 PERIOD FOR FILING ACTIONS ........ 91

Incorporation and Organization................. 109

Maritime Commerce ..............91

PROMOTER .................................. 109 NUMBER AND QUALIFICATIONS OF INCORPORATORS ................... 109 CORPORATE NAME – LIMITATIONS ON USE ......................................... 109 CORPORATE TERM ....................... 109 MINIMUM CAPITAL STOCK AND SUBSCRIPTION REQUIREMENT ............................. 109 ARTICLES OF INCORPORATION .... 109 REGISTRATION AND ISSUANCE OF CERTIFICATE OF INCORPORATION ..................... 113 ADOPTION OF BY-LAWS ................ 114

CHARTER PARTIES ......................... 91 LIABILITY OF SHIP OWNERS AND SHIPPING AGENTS .................92 ACCIDENTS AND DAMAGES IN MARITIME COMMERCE ............. 94 CARRIAGE OF GOODS BY SEA ACT .. 97

The Warsaw Convention .......98 APPLICABILITY .............................. 98 LIMITATION OF LIABILITY .............. 98 WILLFUL MISCONDUCT ..................99

CORPORATION CODE

Corporate Powers ................. 115 GENERAL POWERS, THEORY OF GENERAL CAPACITY ... 115 SPECIFIC POWERS, THEORY OF SPECIFIC CAPACITY .... 116 HOW EXERCISED .......................... 120 TRUST FUND DOCTRINE ............... 122

Corporation........................... 101 DEFINITION ................................... 101 ATTRIBUTES OF THE CORPORATION ....................................................... 101

Classes of Corporations ...... 102

Board of Directors and Trustees ........................ 123

STOCK CORPORATION ................. 102 NON-STOCK CORPORATION ........ 102 OTHER CORPORATIONS ............... 102

DOCTRINE OF CENTRALIZED MANAGEMENT ............................. 123 BUSINESS JUDGMENT RULE......... 125 TENURE, QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS OR TRUSTEES ...... 125 ELECTIONS ................................... 126 REMOVAL ..................................... 127

Nationality of Corporations 105 PLACE OF INCORPORATION TEST 105 CONTROL TEST ............................. 105 GRANDFATHER RULE................... 106

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Mergers and Consolidations.............. 172

FILLING OF VACANCIES .................127 COMPENSATION ...........................127 FIDUCIARY DUTIES AND LIABILITY RULES ........................................... 128 RESPONSIBILITY FOR CRIMES ...... 130 INSIDE INFORMATION .................. 130 CONTRACTS .................................. 131 EXECUTIVE COMMITTEE ................ 131 MEETINGS .................................... 132

DEFINITION AND CONCEPT .......... 172 CONSTITUENT V. CONSOLIDATED CORPORATION ............................. 172 PLAN OF MERGER OR CONSOLIDATION .......................... 172 ARTICLES OF MERGER OR CONSOLIDATION .......................... 172 PROCEDURE ................................. 172 EFFECTIVITY ..................................173 LIMITATIONS .................................173 EFFECTS ........................................173

Stockholders and Members .......................133 RIGHTS OF STOCKHOLDERS AND MEMBERS ......................................133 PARTICIPATION IN MANAGEMENT ...................................................... 134 PROPRIETARY RIGHTS ................. 138 REMEDIAL RIGHTS ....................... 142 OBLIGATIONS OF A STOCKHOLDER ...................................................... 143 MEETINGS .................................... 144

SECURITIES REGULATION CODE State Policy .......................... 175 Securities Required to be Registered .................. 175

Capital Structure ................. 146 SUBSCRIPTION AGREEMENTS ..... 146 CONSIDERATION FOR STOCKS..... 147 SHARES OF STOCK ....................... 147 PAYMENT OF BALANCE OF SUBSCRIPTION .............................. 151 CERTIFICATE OF STOCK ................ 152 STOCK AND TRANSFER BOOK ...... 155 DISPOSITION AND ENCUMBRANCE OF SHARES ................................... 155

Procedure for Registration of Securities ......................... 178 Prohibitions on fraud, manipulation and insider trading .............. 179 MANIPULATION OF SECURITY PRICES .......................................... 179 SHORT SALES ............................... 180 FRAUDULENT TRANSACTIONS .... 180 INSIDER TRADING ........................ 180

Dissolution and Liquidation ................... 156 MODES OF DISSOLUTION ............. 156 METHODS OF LIQUIDATION ......... 159

Protection of Investors ......... 181

Other Corporations ............. 160

TENDER OFFER RULE .................... 181 RULE ON PROXY SOLICITATION ... 182 DISCLOSURE RULE ....................... 182

CLOSE CORPORATIONS................ 160 NON-STOCK CORPORATIONS ...... 167 RELIGIOUS CORPORATIONS ........ 167 FOREIGN CORPORATIONS ........... 168

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Civil Liability......................... 184

Law on Secrecy of Bank Deposits................. 200

CIVIL LIABILITIES ON ACCOUNT OF FALSE REGISTRATION STATEMENT ........ 184 CIVIL LIABILITIES ARISING IN CONNECTION WITH PROSPECTUS, COMMUNICATIONS AND REPORTS .............................. 185 CIVIL LIABILITY OF FRAUD IN CONNECTION WITH SECURITIES TRANSACTIONS........ 186 CIVIL LIABILITY FOR MANIPULATION OF SECURITY PRICES .......................................... 186 CIVIL LIABILITY WITH RESPECT TO COMMODITY FUTURES CONOTRACTS AND PRENEED PLANS ................................. 186 CIVIL LIABILITY ON ACCOUNT OF INSIDER TRADING ................... 186 LIABILITIES OF CONTROLLING PERSONS, AIDER AND ABETTOR AND OTHER SECONDARY LIABILITY ...................................... 187

POLICY ......................................... 200 PURPOSE ..................................... 200 PROHIBITED ACTS ....................... 200 DEPOSITS COVERED .................... 200 ZONES OF PRIVACY ..................... 200 GARNISHMENT OF DEPOSITS ..... 202 CONFIDENTIALITY OF FOREIGN CURRENCY DEPOSITS ................. 202 PENALTIES .................................. 203

General Banking Law of 2000 ............................... 203 POLICY ......................................... 203 DEFINITION AND CLASSIFICATION OF BANKS .................................... 203 DISTINCTIONS BETWEEN BANKS, QUASI-BANKS AND TRUST ENTITIES ..................................................... 204 BANK POWERS AND LIABILITIES . 204 DILIGENCE REQUIRED OF BANKS ....... STIPULATION ON INTERESTS .......207 GRANT OF LOANS AND SECURITY REQUIREMENTS .......................... 208 PENALTIES FOR VIOLATION ......... 212

BANKING LAWS

Philippine Deposit Insurance Corporation Act ................... 213

The New Central Bank Act . 195

PURPOSE OF THE PDIC ................. 213 POWERS OF THE PDIC .................. 213 FUNCTIONS OF THE PDIC.............. 213

STATE POLICIES ........................... 195 SALIENT FEATURES...................... 195 CREATION OF THE BANGKO SENTRAL NG PILIPINAS................................ 195 RESPONSIBILITY AND PRIMARY OBJECTIVE .................................... 195 MONETARY BOARD ...................... 195 HOW THE BSP HANDLES BANKS IN DISTRESS ..................................... 197 HOW THE BSP HANDLES EXCHANGE CRISIS ........................................... 199

Foreign Currency Deposit Act .......................... 216 CONFIDENTIALITY ........................ 216 PRIVILEGES .................................. 216

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PRIOR USE OF MARK AS A REQUIREMENT ............................. 231 TESTS TO DETERMINE CONFUSING SIMILARITY BETWEEN MARKS ......................... 232 WELL-KNOWN MARKS ................. 232 RIGHTS CONFERRED BY REGISTRATION ............................. 233 USE BY THIRD PARTIES OF NAMES, ETC. SIMILAR TO REGISTERED MARK .................234 INFRINGEMENT AND REMEDIES ..234 UNFAIR COMPETITION ................. 237 TRADE NAMES OR BUSINESS NAMES ...................................................... 239 COLLECTIVE MARKS ..................... 239

INTELLECTUAL PROPERTY CODE Intellectual Property Rights, In General ............................ 218 STATE POLICIES ........................... 218 INTELLECTUAL CONVENTIONS GOVERNING INTELLECTUAL PROPERTY RIGHTS ....................... 218 INTELLECTUAL PROPERTY RIGHTS ...................................................... 218 DIFFERENCES BETWEEN COPYRIGHTS, TRADEMARKS AND PATENTS ...................................... 218 TECHNOLOGY TRANSFER ARRANGEMENTS .........................220

Copyrights ........................... 240 DEFINITION ................................. 240 BASIC PRINCIPLES ....................... 240 COPYRIGHTABLE WORKS ............ 240 NON-COPYRIGHTABLE WORKS ....242 RIGHTS OF COPYRIGHT OWNER ...243 RULE ON OWNERSHIP OF COPYRIGHT .................................. 247 LIMITATIONS ON COPYRIGHT...... 248

Patents ................................ 220 PATENTABLE INVENTIONS...........220 NON-PATENTABLE INVENTIONS.. 221 OWNERSHIP OF A PATENT ........... 222 GROUND FOR CANCELLATION OF A PATENT ........................................ 222 REMEDY OF THE TRUE AND ACTUAL INVENTOR .................................... 223 RIGHTS CONFERRED BY A PATENT ...................................................... 223 LIMITATIONS OF PATENT RIGHTS 224 PATENT INFRINGEMENT .............. 225 LICENSING .................................... 226 ASSIGNMENT AND TRANSMISSION OF RIGHTS .................................... 229

SPECIAL LAWS Chattel and Real Estate Mortgage Laws ................... 254 Anti-Money Laundering Act ................... 254

Trademarks......................... 229 DEFINITION OF MARKS, COLLECTIVE MARKS, TRADE NAMES.............................. 229 ACQUISITION OF OWNERSHIP OF MARK ...........................................230 ACQUISITION OF OWNERSHIP OF TRADENAME ................................230 NON-REGISTRABLE MARKS .........230

POLICY OF THE LAW .................... 254 COVERED INSTITUTIONS ............. 254 OBLIGATIONS OF COVERED INSTITUTIONS ............................. 255 COVERED TRANSACTIONS .......... 256 SUSPICIOUS TRANSACTIONS ...... 256

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WHEN IS MONEY LAUNDERING COMMITTED .................................256 UNLAWFUL ACTIVITIES OR PREDICATE CRIMES ..................... 257 ANTI-MONEY LAUNDERING COUNCIL ......................................................258 FREEZING OF MONETARY INSTRUMENT OR PROPERTY ..............................259 AUTHORITY TO INQUIRE INTO BANK DEPOSITS .................................... 260

Foreign Investments Act..... 261 POLICY OF THE LAW ..................... 261 DEFINITION OF TERMS ................. 261 REGISTRATION OF INVESTMENTS ON NON-PHILIPPINE NATIONALS 262 FOREIGN INVESTMENTS IN EXPORT ENTERPRISE ................................. 263 FOREIGN INVESTMENTS IN DOMESTIC MARKET ENTERPRISE ...................................................... 263 FOREIGN INVESTMENT NEGATIVE LIST .............................................. 263

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LETTERS OF CREDIT

MERCANTILE LAW

 Those which do not have one of these conditions shall be mere letters of recommendation. [Art. 568, Code of Commerce]

Definition and Nature of Letter of Credit DEFINITION

NATURE

 Letters of credit 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].

(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].

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:

DURATION 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.

(1) Period stipulated by the parties; or (2) If no period is fixed; (a) 6 months from date if used in the Philippines (b) 12 months if abroad

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LETTERS OF CREDIT

MERCANTILE LAW

TYPES OF LETTERS OF CREDIT

Parties to a Letter of Credit

(1) As to the type of the main contract Commercial Letter Of Standby Letter Of Credit Credit

RIGHTS AND OBLIGATIONS OF THE PARTIES

There would be 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.

Method of payment in Used to guarantee or a contract of sale secure an obligation in a non-sale transaction Reduce the risk of non- Reduce the risk of nonpayment of purchase performance of a price under a contract contractual obligation of sale The seller can obtain payment from the issuer of L/C upon the presentation of documents that show he has taken affirmative steps to comply with the sale agreement

(2) Issuing Bank – the bank which undertakes: (1) to pay the seller upon receipt of the draft and proper documents of title; and (2) 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 [Metropolitan Waterworks and Sewerage System v. Daway, 2004]

The credit is payable upon certification of a party’s nonperformance of the agreement

Beneficiary must Beneficiary must certify demonstrate that he that his obligor has not has performed the performed the contract contract

(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:

(2) As to revocability (a) Revocable L/C - One which can be revoked by the issuing bank without the consent of the buyer and seller (b) 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]

(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].

(3) As to the obligation assumed by correspondent bank (a) Unconfirmed L/C - One which continues to be the obligation of the issuing bank (b) 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]

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LETTERS OF CREDIT

MERCANTILE LAW

 The concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other.

(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].

 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. Court of Appeals, 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].

 The independent nature of the letter of credit may be— (a) Independent in toto - the credit is independent from the justification aspect and is a separate obligation from the underlying agreement; (b) 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].

(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].

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.  It 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

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LETTERS OF CREDIT

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 Philippines v. Luzon Hydro, 2004]  The untrutufulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction against payment. The remedy of injunction is available when the following are present: (1) Clear proof fraud; (2) Fraudulent abuse of the independent purpose of the letter of credit and only fraud under the main agreement and (3) Irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged

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.  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. Court of Appeals, 199])

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TRUST RECEIPTS LAW

Definition/Concept of a Trust Receipt Transaction

MERCANTILE LAW

OWNERSHIP OF THE GOODS, DOCUMENTS AND INSTRUMENTS UNDER A TRUST RECEIPT

A trust receipt is a written or printed document whereby 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. [PD 115, Sec. 4]

 To secure that the banker (entrustee) 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, and he continues to hold that title as his indispensable security until the goods are sold.  The importer (entruster) 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 (entrustee), 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. National Labor Relations Commission (1995)]

A trust receipt transaction is any transaction by and between an entruster and the 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.” (PD 115, Sec. 4)

Rights of the Entruster

LOAN/SECURITY FEATURE

(1) In case of sale: Right to the proceeds from

 In a letter of credit-trust receipt arrangement, a bank extends a loan covered by the letter of credit, and the trust receipt acts as the 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. [Vintola v. Insular Bank of Asia and America (1987)]  The security 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)]

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 (2) In case of non-sale: Right to the return of the goods, documents or instruments (3) Right to the enforcement of all other rights conferred on him in the trust receipt (which are not contrary to the provisions of PD 115) (4) 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 (5) Right to sell the goods, documents or instruments at public or private sale, not less

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TRUST RECEIPTS LAW

than five days after serving or sending of notice to the entrustee of the intention to sell (6) Right to purchase at a public sale the goods, documents, or instruments (7) Right to recover deficiency from the entrustee should the proceeds be insufficient [PD 115, Sec. 7]

MERCANTILE LAW

(3) Insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) Keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) Return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and (6) Observe terms and conditions of the trust receipt not contrary to PD 115. [PD 115, Sec. 9]

The entruster holding a security interest shall not, merely by virtue of such interest or having given the entrustee liberty of sale or other disposition of the goods, documents or instruments under the terms of the trust receipt transaction be responsible as principal or as vendor under any sale or contract to sell made by the entrustee. [PD 115, Sec. 8]

PAYMENT/DELIVERY OF PROCEEDS OF SALE OR DISPOSITION OF GOODS, DOCUMENTS OR INSTRUMENTS

VALIDITY OF THE SECURITY INTEREST AS AGAINST THE CREDITORS OF THE ENTRUSTEE/INNOCENT PURCHASERS FOR VALUE

The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt shall constitute the crime of estafa, punishable under RPC 315, par. 1 (b). [PD 115, Sec. 13]

 The entruster's security interest in goods, documents, or instruments pursuant to the terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement. [PD 115, Sec. 12]  A purchaser of goods from an entrustee with right to sell, or of documents or instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in good faith from the entrustee, acquires said goods, documents or instruments free from the entruster's security interest. [PD 115, Sec. 11]

RETURN OF GOODS, DOCUMENTS OR INSTRUMENTS IN CASE OF NON-SALE The failure to return the goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute estafa, punishable under RPC 315, par. 1 (b). [PD 115, Sec. 13]

OBLIGATION AND LIABILITY OF THE ENTRUSTEE

LIABILITY FOR LOSS OF GOODS, DOCUMENTS OR INSTRUMENTS

(1) 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) 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;

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. [PD 115, Sec. 10]

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TRUST RECEIPTS LAW

MERCANTILE LAW

Warehouseman’s Lien

PENAL SANCTION IF OFFENDER IS A CORPORATION

The warehouseman’s lien under the Warehouse Receipts Law is the warehouseman’s legal right or interest in the depositor’s property. It is similar to the depositary’s right of retention, which is a means or device by which the depositary is able to obtain payment of what may be due because of the deposit [GomezSomera].

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. [PD 115, Sec. 13]

CLAIMS INCLUDED IN WAREHOUSEMAN’S LIEN

Remedies Available

THE

A warehouseman shall have a lien on the goods deposited or the proceeds thereof in his hands: (1) All lawful charges for storage and preservation of the goods (2) All lawful claims for money advanced, interest, insurance, transportation, labor, weighing, coopering, and other charges and expenses in relation to other goods (3) All reasonable charges and expenses for notice and advertisements of sale (4) Sale of the goods where default had been made in satisfying the warehouseman’s lien [Act No. 2137, Sec. 27]

UPON DEFAULT OR FAILURE OF THE ENTRUSTEE TO COMPLY WITH THE TERMS AND CONDITIONS

(a) The entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom. (b) The entruster may sell the goods, documents or instruments not less than five days after serving or sending of the requisite notice, and the entruster may become a purchaser at a public sale. (c) The proceeds 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. [PD 115, Sec. 7]

However, if a negotiable receipt is issued for the goods, the warehouseman shall have no lien thereon except for charges for storage of goods subsequent to the date of the receipt unless the receipt expressly enumerated other charges for which a lien is claimed. In such case, there shall be a lien for the charges enumerated so far as they are within Sec. 27 although the amount of the charges is not stated in the receipt. [Act No. 2137, Sec. 30]

IN CASE OF FAILURE TO TURN OVER THE PROCEEDS OF THE SALE, OR FAILURE TO RETURN IN CASE OF NON-SALE

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

File a criminal case for estafa under RPC 315, par. 1 (b). [PD 115, Sec. 13]

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TRUST RECEIPTS LAW

same by him at the time of the deposit to one who took the goods in good faith for value would have been valid. [Act No. 2137, Sec. 28]

MERCANTILE LAW

Exception: Any person claiming a right of property or possession may pay the warehouseman the amount necessary to satisfy his lien and to pay the reasonable expenses and liabilities incurred. The warehouseman shall deliver the goods to the person making payment. [Act No. 2137, Sec. 33]

SATISFACTION OF LIEN BY SALE

A warehouseman's lien for a claim, which has become due, may be satisfied as follows: (a) An itemized statement of the warehouseman's claim, showing the sum due at the time of the notice and the date or dates when it becomes due, (b) A brief description of the goods against which the lien exists, (c) A demand that the amount of the claim as stated in the notice of such further claim as shall accrue, shall be paid on or before a day mentioned, not less than ten days from the delivery of the notice if it is personally delivered, or from the time when the notice shall reach its destination, according to the due course of post, if the notice is sent by mail, (d) A statement that unless the claim is paid within the time specified, the goods will be advertised for sale and sold by auction at a specified time and place. [Act No. 2137, Sec. 33]

EFFECT OF SALE The warehouseman shall not be liable for failure to deliver the goods to the depositor or owner of the goods or to a holder of the receipt given for the goods when they were deposited, even if such receipt be negotiable. [Act No. 2137, Sec. 36]

OTHER METHODS ENFORCING LIEN

OF

Other remedies allowed by law for the enforcement of a lien against personal property are not precluded. The right to recover so much of the warehouseman's claim as shall not be paid by the proceeds of the sale is not barred as well. [Act No. 2137, Sec. 35]

HOW LIEN MAY BE LOST (1) By surrendering possession of the goods (2) By refusing to deliver the goods when a demand is made with which he is bound to comply [Act No. 2137, Sec. 29]

 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. [Act No. 2137, Sec. 33]

LIEN DOES NOT PRECLUDE OTHER REMEDIES

 From the proceeds of such sale, the warehouseman shall satisfy his lien including the reasonable charges of notice, advertisement and sale. The balance, if any, shall be held by the warehouseman and delivered on demand to the person to whom he would have been bound to deliver or justified in delivering goods. [Act No. 2137, Sec. 33]

Whether or not a warehouseman has a lien upon the goods, he is entitled to all remedies allowed by law to a creditor against a debtor for the collection of all charges and advances which the depositor has contracted to pay. (Act No. 2137, Sec. 32)

AT ANY TIME BEFORE THE GOODS ARE SO SOLD

General rule: The warehouseman shall retain the possession of the goods according to the terms of the original contract of deposit

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NEGOTIABLE INSTRUMENTS

Definition

MERCANTILE LAW

of obligations, negotiable instruments are not legal tender.  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]  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.  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]

DEFINITION AND PURPOSE

 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 Negotiable Instruments Law [NIL; Act 2031, 03 February 1911].  However, the fact that an instrument does not meet the foregoing requisites will not affect its validity, the only consequence being that it will be governed not by the NIL but by the general law on contracts [Campos]. Negotiable Instruments Not Legal tender Art. 1249, Civil Code. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.

Forms and Interpretation REQUISITES OF NEGOTIABILITY

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.

Section 1, Negotiable Instruments Law (NIL). Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer;

In the meantime, the action derived from the original obligation shall be held in the abeyance. [1170]

(b) Must contain an unconditional promise or order to pay a sum certain in money; Must be payable on demand, or at a fixed or determinable future time; Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

Section 52, New Central Bank Act. Legal Tender Power. - All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private: Provided, however, That, unless otherwise fixed by the Monetary Board, coins shall be legal tender in amounts not exceeding Fifty pesos (P50.00) for denominations of Twenty-five centavos and above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos or less.

REQUISITES OF A PROMISSORY NOTE Section 184, NIL. Promissory note, defined. - A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person to another, signed

 Although considered as medium for payment

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MERCANTILE LAW

Notes:  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  Signature of any party may be made by duly authorized agent; no particular form of appointment necessary [Sec. 19, NIL]  Signature is binding and may be in one’s 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 [Campos].  Signature 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], NIL]

by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order, it is not complete until indorsed by him.

REQUISITES OF A BILL OF EXCHANGE Section 126, NIL. Bill of exchange, defined. - A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer.

SECOND REQUIREMENT: CONTAINING AN UNCONDITIONAL PROMISE TO PAY OR ORDER TO PAY A SUM CERTAIN IN MONEY

Section 184 (defining a promissory note) and Section 126 (defining a bill of exchange) of the NIL contain the same requisites as in Section 1.

FIRST REQUIREMENT: IN WRITING AND SIGNED BY THE MAKER OR DRAWER

Section 3, NIL. When promise is unconditional. An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with:

Section 18, NIL. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But 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.

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

IN WRITING

But an order or promise to pay out of a particular fund is not unconditional.

What is considered "In writing" - includes print; written or typed. Section 191 of the NIL provides that the word “’written’ includes printed, and ‘writing’ includes print.”

UNCONDITIONAL

 The promise or order to pay, to be unconditional, must be unqualified [Campos].  Must not be dependent upon a contingent event that is not certain to happen. [Abad]  The fact that the condition appearing on the instrument has been fulfilled will not convert it into a negotiable one [see Sec. 4, NIL]

Rationale for requirement: Since an instrument is a document, there must be something in written form that can be transferred from person to person. [Abad]

SIGNED

General Rule: No person is liable on the instrument whose signature does not appear thereon.

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Indicating a Particular Fund (non-negotiable)

MERCANTILE LAW

(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.

(a) with interest; or (b) by stated installments; or (c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or (d) with exchange, whether at a fixed rate or at the current rate; or (e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity.

Particular fund indicated is not the direct source of payment.

Particular fund indicated is the direct source of payment. [Sundiang and Aquino]

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]

Fund for Reimbursement

When conditional: 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]

PAYABLE IN MONEY

 The instrument must be 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), NIL and PNB v. Zulueta]  An agreement to pay in foreign currency is valid. [RA 8183]

ORDER OR PROMISE TO PAY

 As to promissory note: Promise to pay should be express on the face of the instrument [Campos].  The word "promise" is not absolutely necessary. Any expression equivalent to a promise is sufficient [Campos].  Mere acknowledgment of a debt is insufficient [Campos].  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.

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 of the NIL)  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]  But it is 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 A FIXED OR DETERMINABLE FUTURE TIME

SUM PAYABLE MUST BE CERTAIN

Rationale: to inform the holder of the instrument of the date when he may enforce payment thereof.

Section 2, NIL. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this Act, although it is to be paid:

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NEGOTIABLE INSTRUMENTS

MERCANTILE LAW

 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 after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain, e.g., “payable within 60 days after the death of Jose”

ON DEMAND Section 7, NIL. When payable on demand. - An instrument is payable on demand: (a) When it is so expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed. 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.

EFFECT OF ACCELERATION PROVISIONS  If option (absolute or conditional) to accelerate maturity is on the maker, the instrument is still NEGOTIABLE [Campos].  If option to accelerate is on the holder and can be exercised only after the happening of a specified event/act over which he has no control (conditional), the instrument is still NEGOTIABLE [Campos].  Note: If option on the part of the holder is absolute, the instrument is non-negotiable.

Note: The holder may call for payment any time; and the maker has an option to pay at any time. 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, NIL]

INSECURITY CLAUSES Provisions in the contract which allow the holder to accelerate payment “if he deems himself insecure.” The instrument is rendered non-negotiable. [Sundiang and Aquino] PROVISIONS EXTENDING TIME OF PAYMENT General rule: Negotiability not affected. Effect is similar with that of an acceleration clause at the option of the maker [Campos].

AT A DETERMINABLE FUTURE TIME Section 4, NIL. Determinable future time; what constitutes. - An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable: (a) At a fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (c) 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.

Exception: Where a note with a fixed maturity provides that the maker has the option to extend time of payment until the happening of contingency, the instrument is NOT negotiable. The time for payment may never come at all.

PAYABLE TO ORDER OR TO BEARER (ASKED IN 1998)

INSTRUMENT MUST CONTAIN WORDS OF NEGOTIABILITY For example: (1) “Pay to the order of Juan Cruz”, or “I promise to pay to the order of Juan Cruz” (2) “Pay to Juan Cruz or order”, or “I promise to pay Juan Cruz or order”

Note: It is required 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.”

Note: Instrument need not follow the language of the law, but any term which clearly indicates

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an intention to conform requirements is sufficient.

NEGOTIABLE INSTRUMENTS

to

the

MERCANTILE LAW

legal

intend to pay the specified persons. [PNB v. Rodriguez, 2008]

NEGOTIABILITY DETERMINED FROM THE FACE OF THE INSTRUMENT The negotiability or non-negotiability of an instrument is determined from the face of the instrument itself. Where words "or bearer" printed on a check are cancelled by the drawer, instrument becomes not negotiable. [Caltex vs. CA, 1992]

A check drawn payable to the order of cash is a check payable to bearer, and the bank may pay it to the person presenting it for payment without the drawer's indorsement. [Ang Tek Lian vs. CA, 1950] PAYABLE TO ORDER Section 8, NIL. When payable to order. - The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of:

PAYABLE TO BEARER Section 9, NIL. When payable to bearer. - The instrument is payable to bearer: (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank.

(a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or (d) Two or more payees jointly; or (e) One or some of several payees; or (f) The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. Notes: Without the words "to order" or "to the order of" the instrument is payable only to the person designated therein and is therefore nonnegotiable. [Consolidated Plywood Industries vs. IFC Leasing, 1987]

Examples: (1) Expressed to be so payable - "I promise to pay the bearer the sum" (2) Payable to a person named therein or bearer -"Pay to A or bearer" (3) Payable to the order of a fictitious person or non-existing person, and such fact was known to the person making it so payable “Pay to John Doe or order" (4) Name of payee does not purport to be the name of any person – "Pay to cash"; "Pay to sundries." (5) Only or last indorsement is an indorsement in blank.

WHERE THE MAKER IS THE PAYEE (1) In effect making himself liable to himself. Thus, the instrument produces no legal effect. (2) Will produce legal effects only once the payee-maker indorses the instrument to another person because such indorsement will then give rise to rights and obligations. [Abad]

FICTITIOUS PAYEE RULE It is not necessary that the person referred to in the instrument is really non-existent or fictitious to make the instrument payable to bearer. The person to whose order the instrument is made payable may in fact be existing but he is still fictitious or non-existent under Sec. 9(c) of the NIL if the person making it so payable does not

IF BILL OF EXCHANGE, DRAWEE MUST BE NAMED OR DESIGNATED WITH REASONABLE CERTAINTY (1) Applies only to a bill of exchange (2) A bill may be addressed to 2 or more drawees jointly whether they are partners or not, but not to 2 or more drawees in the alternative or in succession [Sec. 128, NIL].

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NEGOTIABLE INSTRUMENTS

Kinds of Negotiable Instrument

Examples: (1) “To Juan Cruz and Jose Reyes” – negotiable (2) “To Juan Cruz or Jose Reyes” – not negotiable; no certainty as to drawee

PROMISSORY NOTE

DETERMINATION OF NEGOTIABILITY  In determining the negotiability of an instrument, the instrument in its entirety and by what appears on its face must be considered. It must comply with the requirements of Sec. 1 of the Negotiable Instruments Law. [Caltex Phils. v. CA, 1992]  The acceptance of a bill of exchange is not important in the determination of its negotiability. The nature of acceptance is important only on the determination of the kind of liabilities of the parties involved. [PBCOM vs. Aruego, 1993] Omissions and Provisions That Do Not Affect Negotiability

MERCANTILE LAW

Section 184, NIL. Promissory note, defined. - A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker's own order, it is not complete until indorsed by him.

KINDS OF PROMISSORY NOTES

(1) Certificate of deposit – a form of promissory note which is a written acknowledgment of a bank of its receipt of a certain sum with a promise to repay the same. (2) Bonds – a certificate or evidence of a debt on which the issuing company or governmental body promises to pay the bondholders a specified amount of interest for a specified length of time, and to repay the loan on the expiration date. (3) Debenture – a promissory note or bond backed by the general credit of a corporation and usually not secured by a mortgage or lien on any specific property. (Sundiang and Aquino)

Additional Provisions That Do Not Affect Negotiability

(1) Non-dating of the (1) Authorizes the sale instrument of collateral (2) Non-specification of securities on value given, or that default; any value had been (2) Authorizes given confession of (3) Non-specification of judgment on place where it is default; drawn or place (3) Waives the benefit where it is payable of law intended to (4) Bears a seal protect the debtor; or

BILL OF EXCHANGE Section 126, NIL. Bill of exchange, defined. - A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126)

(5) Designation of (4) Allows the creditor particular kind of the option to require currency in which something in lieu of payment is to be money. (Sec. 5) made. (Sec. 6) Note: Negotiability is affected when instrument contains a promise or order to do any act in addition to the payment of money.

KINDS OF BILLS OF EXCHANGE

(1) Draft – used synonymously with bill of exchange although it normally refers to a bill of exchange used in documentary exchange like letters of credit transactions. (2) Inland and foreign bill – an Inland bill is a bill which is, or on its face purports to be, both

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NEGOTIABLE INSTRUMENTS

drawn and payable within the Philippines. Any other bill is a foreign bill. (3) Time draft – draft that is payable at a fixed date. (4) Sight or demand draft – payable when the holder presents it for payment. (5) Trade acceptance – used in contracts of sale where the seller as drawer orders the buyer (as drawee) to pay a sum certain to the same seller (payee). (6) Banker’s acceptance – a time draft across the face which the drawee has written the word accepted. [Sundiang and Aquino] (7) Check - A bill of exchange drawn on a bank payable on demand [Sec. 185]. It is the most common form of bill of exchange.

MERCANTILE LAW

holder may treat it as either at his election [Sec. 17[e], NIL] Promissory Note

Bill of Exchange

Unconditional promise Unconditional order Involves 2 parties Maker liable

is

Involves 3 parties

primarily Drawer is only secondarily liable

Only one presentment: Two presentments: for for payment acceptance and for payment Bill of Exchange

Check

INSTANCES WHEN A BILL OF EXCHANGE MAY BE TREATED AS A PROMISSORY NOTE:

Not necessarily drawn on a deposit. The drawee need not be a bank

Section 130, NIL. When bill may be treated as promissory note. - Where in a bill the drawer and drawee are the same person or where the drawee is a fictitious person or a person not having capacity to contract, the holder may treat the instrument at his option either as a bill of exchange or as a promissory note.

It is necessary that a check be drawn on a bank deposit. Otherwise, there would be fraud.

Death of a drawer of a BOE, with the knowledge of the bank, does not revoke the authority of the drawee to pay.

Death of the drawer of a check, with the knowledge of the bank, revokes the authority of the banker to pay.

May be presented for payment within reasonable time after its last negotiation.

Must be presented for payment within a reasonable time after its issue.

Section 17, NIL. Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply:

May be payable on Always payable demand or at a fixed or demand determinable future time

x---x (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election;

on

Completion and Delivery

x---x (1) The drawer and the drawee are the same person; (2) Drawee is a fictitious person; (3) Drawee does NOT have the capacity to contract (Sec. 130, NIL] (4) Where the bill is drawn on a person who is legally absent; (5) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the

TWO STEPS INVOLVED IN THE EXECUTION OF NEGOTIABLE INSTRUMENTS

(1) Writing of the instrument completely in accordance with the requisites of negotiability under Sec. 1. (2) Delivery of the instrument by the maker or the drawer to the payee in order to give legal effect thereto. [Abad]

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NEGOTIABLE INSTRUMENTS

MERCANTILE LAW

instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time .

Note: It may sometimes be dificult to locate the boundary line between a complete and an incomplete instrument... It would seem that if an instrument contains all the requisites for making it a negotiable one, it should be considered as complete though it in fact may have blanks as to non-essentials... [Campos]

INSERTION OF DATE Section 13, NIL. When date may be inserted. Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.

INCOMPLETE AND UNDELIVERED INSTRUMENTS

Section 15, NIL. Incomplete instrument not delivered. - Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery.

Any holder may insert the true date of issue or acceptance of an instrument where: (1) The instrument is expressed to be payable at a fixed period after date is issued undated; or (2) The acceptance of an instrument payable at a fixed period after sight is undated.

In this case a real defense exists and not even a holder in due course can recover on the instrument, for the law is specific that it is not a valid contract in the hands of any holder [Campos].

EFFECT OF ANTE-DATING AND POST-DATING

Note: A drawee bank whose negligent custody of the checks, after partial execution, contributed to its escape, is stopped from raising the real defense under Sec. 15 of the NIL [Campos].

Section 12, NIL. Ante-dated and post-dated.- The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery.

COMPLETE AND UNDELIVERED INSTRUMENTS

COMPLETION OF BLANKS

Section 16, NIL. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case

Section 14, NIL. Blanks; when may be filled. Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable

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may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.

Hence:

 Non-delivery of a complete instrument is a personal defense [Campos]  Delivery of an instrument is a prerequisite for liability. If the instrument is complete in all its particulars, but is not delivered, there is no contract. However if the instrument is no longer in the possession of a party who has signed it, a delivery is presumed until the contrary is proved [Campos].  If the holder of the instrument is a holder in due course, the instrument is not merely prima facie deemed delivered, but this fact is conclusively presumed [Campos].

Quadrant 1  Rights and obligations attach

DELIVERED Quadrant 1 Quadrant 2 Complete Incomplete Delivered Delivered COMPLETE Quadrant 3 Quadrant 4 Complete Incomplete Undelivered Undelivered

Quadrant 2  Apply Sec. 14  There is prima facie authority to fill the blanks but first prove that you have authority to fill up  Note further that for the presumption to apply, issuance is necessary Quadrant 3  Apply Sec. 15  Cannot be a valid contract as to ANY holder  No contract, zero chance of becoming negotiable instrument

INCOMPLETE AND DELIVERED INSTRUMENTS [Sec. 14, NIL] (1) Holder has prima facie authority to fill up the instrument. (2) The instrument must be filled up strictly in accordance with the authority given and within reasonable time (3) HDC may enforce the instrument as if filled up according to (2) above. This provision merely raises a personal defense [Campos]

Quadrant 4  Apply Sec. 16  Until it is delivered, the instrument remains to be revocable  Maker or drawer can withhold release  However, once it is found in the hands of a holder, there is a presumption of delivery o If he is a HNIDC – prima facie presumption o If he is a HIDC – conclusive presumption

COMPLETE AND INSTRUMENTS

Signature

DELIVERED

In a complete and delivered instrument, rights and liabilities under the negotiable instruments law attach.

Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly provided. But 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.

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General rule: One whose signature does not appear on the instrument shall not be liable thereon.

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within the actual limits of his authority (Sec. 21, NIL)  According to the majority rule, the words “per proc” or “procuration” must appear on the note for this rule in Section 21 to be applicable [Campos]

Exceptions: (1) The principal who signs through an agent (2) The forger (3) One who indorses in a separate instrument (allonge) OR where an acceptance is written on a separate paper (4) One who signs his assumed or trade name (5) A person negotiating by delivery (as in the case of a bearer instrument) is liable only to his immediate indorsee.

LIABILITY OF AN AGENT

General rule: Where a person adds to his signature words indicating that he signs on behalf of a principal, then he is not liable if he was duly authorized. Exceptions: (1) Mere addition of words describing him as an agent WITHOUT disclosing his principal (Sec. 20, NIL) (2) Where a broker or agent negotiates an instrument without indorsement, he incurs all liabilities in Sec. 65 of the NIL, unless he discloses name of principal and the fact that he is only acting as an agent. [Sec. 69, NIL]

SIGNING IN TRADE NAME 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, NIL]

SIGNATURE OF AGENT Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency.

Requisites to negative personal liablity of agent: (1) He must be duly authorized; (2) He must act within the scope of his authority (3) He must indicate in the instrument that he is signing merely as agent; and (4) He must disclose his principal.

Sec. 20. Liability of person signing as agent, and so forth. - Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability.

INDORSEMENT BY MINOR OR CORPORATION

 The indorsement or assignment of the instrument by a corporation or by an infant (minor) passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon [Sec. 22, NIL].  The above provision does not change the rule in civil law on minor's contracts, which provides that a contract enetered into by a minor is voidable, and the minor cannot be held liable thereon unless he ratifies it upon reaching majority.  However, under Section 22 of the NIL, should the minor indorse a negotiable instrument, although he cannot be held liable on his contract of indorsement, title to the instrument passes to his indorsee and the

Signature of any party may be made by duly authorized agent, established as in ordinary agency.

SIGNATURE PER PROCURATION

 A signature per procuration operates as notice to the holder that the agent has a limited authority to sign, and the principal is bound only in case the agent in so signing acted

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latter can rightfully recover from the maker, free from the defense of minority [Campos].  REAL defense but available only to the incapacitated party (i.e. the minor or the corporation).

(2) Those who, by their acts, silence, or negligence, are estopped from setting up the defense of forgery.

FORGERY

PROMISSORY NOTE

RULES ON FORGERY Maker’s signature forged (1) Maker is not liable because he never became a party to the instrument. (2) Indorsers subsequent to forgery are liable because of their warranties. (3) Party who made the forgery is liable.

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

Payee’s signature forged (1) Payee is not liable. (2) Maker is still liable. (REASON: Indorsement is not necessary to title and the maker engages to pay holder) (3) Indorsers subsequent to forgery are liable. (4) Party who made the forgery is liable.

Counterfeit making or fraudulent alteration of any writing, which may consist of: (1) Signing of another’s name with intent to defraud; or (2) Alteration of an instrument in the name, amount, name of payee, etc. with intent to defraud.

Indorser’s signature forged (1) Maker, payee, indorser whose signature/s was/were forged, and all indorsers preceding the forgery are not liable. (2) Indorsers subsequent to forgery are liable. (3) Party who made the forgery is liable.

General rule: When a signature is forged or made without the authority of the person, only the forged signature (not the instrument itself and the other genuine signatures) is wholly inoperative Effects: (1) No right to retain the instrument (2) No right to give a discharge therefor (3) No right to enforce payment thereof against any party thereto can be acquired through or under such signature

BILL OF EXCHANGE

Drawer’s signature forged (1) Drawer is not liable because he was never a party to the instrument. (2) Drawee is liable if it paid or accepted the instrument (no recourse to drawer) because he admitted the genuineness of the drawer’s signature [Sec. 62, NIL; Price v. Neal]. Drawee cannot recover from the collecting bank because there is no privity between the collecting bank and the drawer. The collecting bank does not give any warranty re: the drawer’s signature.[(Associated Bank vs. CA] (3) Indorsers subsequent to forgery are liable (such as collecting bank or last endorser) (4) Party who made the forgery is liable

Exception: The party against whom it is sought to be enforced is precluded from setting up the forgery or want of authority as a defense [Sec. 23, NIL].

PERSONS PRECLUDED FROM SETTING UP DEFENSE OF FORGERY

[CAMPOS]

Payee’s signature forged (1) Payee is not liable (2) Drawer is still secondarily liable (3) Drawee is liable if it paid or accepted the instrument [Sec. 62, NIL; Price v. Neal], but it

(1) Those who warrant or admit the genuineness of the signature in question. This includes indorsers, persons negotiating by delivery and acceptors.

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may pass liability back through the collection chain (4) Indorsers subsequent to forgery are liable (such as collecting bank) (5) Party who made the forgery is liable

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check or draft, is extended to overdrafts and stop payment orders. (a) Overdraft occurs when a check is issued for an amount more than what the drawer has in deposit with the drawee bank. Rule: The drawee who pays the holder of the bill cannot recover from the holder what he paid under mistake [Campos] (b) Stop Payment Order is one issued by the drawer of a check countermanding his first order to the drawee bank to pay the check. Rule: The drawee bank is bound to follow the order, provided it is received prior to its certification or payment of the check [Campos].

Indorser’s signature forged (1) Drawer, payee, indorser whose signature/s was/were forged and all indorsers preceding the forgery are not liable. (2) Drawee is liable if it paid or accepted the instrument [Sec. 62, NIL; Price v. Neal]. (3) Indorsers subsequent to forgery are liable. (such as collecting bank) (4) Party who made the forgery is liable.

ACCEPTANCE AND PAYMENT UNDER MISTAKE

(3) Effects of Negligence of Depositor  If such negligence of the depositor was the proximate cause of the loss, the draweebank would NOT be liable  The negligence of the depositor/drawer would consist of the failure to to carefully examine bank statements, cancelled checks, his check stubs, and other pertinent records within a reasonable time and to report any errors without unreasonable delay to the drawee bank.  If a drawer/depositor’s negligence and delay should cause a bank to honor a forged check, the drawer cannot later complain should bank refuse to recredit his account [Campos].

Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits: (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse. (1) When the drawee accepts or pays a forged instrument  Price v. Neal doctrine: As between equally innocent persons, the drawee who pays money on, or accepts, a check or draft the signature on which was forged CANNOT recover the money from the one who received it. The drawee is bound to know the signature of its depositor.  A bank is bound to know the signatures of its depositors. If a bank pays a forged check it must be considered as making the payment out of its own funds and cannot charge the account of the depositor whose signature was forged. [PNB vs. Quimpo, 1988]  A bank is liable, irrespective of its good faith, in paying a forged check. [Samsung vs. Far East Bank, 2004]

(4)

Effect of Payment under Forged Indorsements In the case of a drawee's acceptance or payment of a bill on which only an INDORSEMENT has been forged, the drawee can recover the amount paid out by him. RATIONALE: The drawee makes no warranty as to the genuineness of any indorsement [Campos]. (5) Effect of negligence of drawee in informing recipient of forgery  The rule is that a drawee's acceptance or payment of a bill on which only an INDORSEMENT has been forged is not a bar to his right to recover the amount paid out by him; however, there is an exception to this rule.

(2) Extensions of Price v. Neal doctrine  Notes: The bar to recovery on the part of a drawee who pays money on, or accepts, a

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 If it is shown that the drawee on learning of the forgery did not give prompt notice of it to the holder and that damage resulted to said holder, recovery by the drawee is barred [Clearfield Trust Co. v. US, 1943]

MERCANTILE LAW

indorsement, the drawee bank may be held liable to the collecting bank.  Furthermore, when both the collecting bank and the drawee bank are guilty of negligence, the degree of negligence of each will be weighed in considering the amount of loss which each should bear [BPI v CA, 1992]

(6) Effect of negligence of drawer in case of forged indorsement on checks The drawer, as soon as he comes to know of a forged indorsement should promptly notify the drawee bank. Otherwise, should his negligent delay be the proximate cause of any subsequent loss to the bank, the latter may properly charge it to the drawer's account.

Consideration Section 25, NIL. Value, what constitutes. — Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time.

(7) Comparing the liability of a collecting bank and a drawee bank A collecting bank is only liable for forged indorsements and not forgeries of the drawer or maker’s signature [PNB v CA, 1968].

Section 191, NIL. Definition and meaning of terms. - In this Act, unless the contract otherwise requires: x---x "Value" means valuable consideration; x---x

Rationale: In presenting the checks for clearing, the collecting agent made an express guarantee on the validity of “all the prior endorsements.”  The collecting bank or last indorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment had done its duty to ascertain the genuineness of the indorsements [BPI v CA, 1992].  A drawee bank is not liable for forged indorsements.

 “Value” and “consideration” are generally convertible terms. However, they may have different implications. When the payee of a noet sues the maker, or the payee of a bill sues the drawer, or an indorsee sues his immediate indorser, the word “consideration” is the more proper term to use. But where a holder sues any party to the instrumetn with whom he himself has not dealt, the term “value” is more appropriate.  An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time. [Sec. 25, NIL]  Value need not be full and a holder will be one for value even if he gave less than the face value of the instrument, provided the intention of the transferor is to transfer the full amount represented by the instrument.

Rationale: The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness of any indorsement. The drawee bank’s duty is but to verify the genuineness of the drawer’s signature and not of the indorsement because only the drawer is its client.

WHO IS A HOLDER FOR VALUE (HFV)?

Note:  However, it should be noted that as an exception to the rule that a drawee bank is not liable for a forged indorsement, when the negligence of the drawee bank is the proximate cause of the collecting bank’s payment of a check with a forged

(1) A holder of an instrument for which value, which need not be in full, has been given at any given time but only with respect to all parties who have become parties to the

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instrument prior to the time at which value has been given. [Sec 26, NIL] (2) A holder who has a lien on the instrument but only to the extent of his lien. [Sec 27, NIL]

MERCANTILE LAW

LIABILITY OF AN ACCOMMODATION PARTY

 Section 28 of the NIL states that the holder for value to whom the instrument thus executed is subsequently negotiated has a right of recourse against the accommodation party in spite of the former’s knowledge that no consideration passed between the accommodation and accommodated parties.  Does this mean that the accommodation party is liable to a holder even if he is not a holder in due course, provided he is a holder for value? The Supreme Court has ruled that an accommodation party is liable ONLY to a HOLDER IN DUE COURSE. However, the mere fact that the holder knew of the accommodation does not prevent him from being a holder in due course in order to recover from the accommodation party. [Stelco Marketing Corp. v. CA, 1992]

BURDEN OF PROOF PRESUMPTION OF CONSIDERATION Section 24, NIL. Presumption of consideration. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.

EFFECT OF WANT OF CONSIDERATION Section 28, NIL. Effect of want of consideration. Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise.  Absence or failure of consideration is a matter of defense as against any person not a holder in due course, hence, it is a personal defense  Partial failure of consideration is a defense pro tanto, meaning a defense to the extent of the failure [Abad].

ACCOMMODATION PARTY AS SURETY

 An accommodation Party is generally regarded as a surety for the party accommodated  When the accomodation party makes payment to holder of the note, he has the right to sue the accommodated party for reimbursement. [Agro Conglomerates, Inc. v. CA, 2000]  Note: A corporation cannot act as an accommodation party. The issue or endorsement of negotiable instruments by a corporation without consideration and for the accommodation of another is ultra vires [Crisologo v. CA, 1989]

Accommodation Party Section 29, NIL. Liability of accommodation party. - An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party.

Negotiation Section 30, NIL. What constitutes negotiation. An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery.

An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person.

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Requisites (1) Mechanical act of writing the instrument completely and in accordance with the requirements of Section 1 of the NIL; and (2) The delivery of the complete instrument by the maker or drawer, with the intention of giving effect to it, to the payee or holder.

NEGOTIATION DISTINGUISHED FROM ASSIGNMENT Negotiation

Assignment

The transfer of the instrument from one person to another so as to constitute the transferee the holder thereof [Sec.30, NIL].

The transferee does not become a holder, nor can he become a holder in due course; and he merely steps into the shoes of the transferor. As such, any defense available against the transferor is available against the transferee.

MERCANTILE LAW

Presumption of delivery (1) Where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved [Sec. 16, NIL] (2) If it is in the hands of a holder in due course, the presumption of a valid delivery is conclusive [Sec. 16, NIL]

Transfer is a broader term than negotiation. If an instrument is transferred without negotiation, the transfer is a mere assignment which constitutes the transferee as a mere assignee, not a holder, subject to all defenses existing among prior parties. Transfer thus includes both an ordinary assignment and a negotiation [Campos].

Presumption as to date (1) Date is not an essential element of negotiability; it is not included in the requirements for an instrument to be negotiable under Sec. 1 of the NIL. (2) An undated instrument is considered to be dated as of the time it was issued [Sec. 17 (c), NIL]

MODES OF NEGOTIATION

BY INDORSEMENT COMPLETED BY DELIVERY – IF PAYABLE TO ORDER

BY DELIVERY – IF PAYABLE TO BEARER [SEC. 30]

[SEC. 30]

Section 191, NIL. Definition and meaning of terms. - In this Act, unless the contract otherwise requires: x---x "Delivery" means transfer of possession, actual or constructive, from one person to another; x---x "Issue" means the first delivery of the instrument, complete in form, to a person who takes it as a holder; x---x

Section 191, NIL. Definition and meaning of terms. - In this Act, unless the contract otherwise requires: x---x "Indorsement" means an indorsement completed by delivery; x---x INDORSEMENT; HOW DONE Section 31, NIL. Indorsement; how made. - The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement.

 Delivery means transfer of possession of instrument by the maker or drawer, with intent to transfer title to the payee and recognize him as holder thereof  Issuance is the FIRST delivery of the instrument complete in form to a person who takes it as a holder.

(1) Where placed – The indorsement must be written [Sec. 31, NIL]: (a) On the instrument itself [Sec. 31, NIL], or (b) On a separate piece of paper attached to the instrument called “allonge”[Sec. 31, NIL]

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(2) Signature of the indorser, without additional words, is a sufficient indorsement [Sec. 31, NIL]

MERCANTILE LAW

(b) But where the instrument is payable to “A or B”, they payees are merely in the alternative, and either one may valdily negotiate the same [Campos].

(3) Must be of the ENTIRE instrument Section 32, NIL. Indorsement must be of entire instrument. - The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue.

KINDS OF INDORSEMENT Section 33, NIL. Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either restrictive or qualified or conditional. There are four bases of classification of indorsements under the NIL: (1) Special or in blank (2) Restrictive or Non-Restrictive (3) Qualified or unqualified (4) Conditional or unconditional

(a) CANNOT indorse a part only of the amount payable; BUT if the instrument has been paid in part, then the instrument may be indorsed as to the residue [Sec. 32] NIL (b) CANNOT transfer the instrument to two or more indorsees severally [Sec. 32, NIL] (c) If not an indorsement of the entire instrument, the transfer remains valid, but as a mere assignment which subjects the holder to all defenses on the instrument [Campos]

All of the four bases of classification coexist with each other; thus, an indorsement may be special and qualified at the same time. It may also be special and unqualified, special and restrictive, special, unrestrictive and unqualified and so on [Campos].

AS TO MANNER OF FUTURE METHOD OF NEGOTIATION Section 34, NIL. Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery.

(4)

If name misspelled in indorsement, indorsement will be prima facie deemed not valid. Section 43, NIL. Indorsement where name is misspelled, and so forth. - Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper signature.

Section 40, NIL. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement.

(a) The indorsement should be made by the holder in the manner he was designated, otherwise the signature will prima facie not be a valid indorsement of the instrument [Sec 43, NIL] (5) Indorsement where there are joint payees (a)Where the instrument is payable or indorsed to “A and B,” they are joint payees and an indorsement by either A or B only will not constitute a valid negotiation, UNLESS the one indorsing is authorized by the other [Campos].

Section 35, NIL. Blank indorsement; how changed to special indorsement. - The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement.

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(1) Special (a) Specifies the person to whom/to whose order the instrument is to be payable; indorsement of such indorsee is necessary to further negotiation. (b) A special indorser is liable to all subsequent holders, unless the instrument is an originally bearer instrument, in which case he is liable only to those who take title through his indorsement [Sec. 40, NIL]. (c) An instrument, payable to bearer, and indorsed specially, may nevertheless be further negotiated by delivery. [Sec 40, NIL]  Originally bearer instrument always remains a bearer instrument [Sundiang and Aquino] (2) Blank (a) Specifies no indorsee, instrument so indorsed is payable to bearer, and may be negotiated by delivery (b) The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. [Sec 35, NIL] (c) An order instrument may be converted into a bearer instrument by means of a blank indorsement, and may be later reconverted into an order instrument by a subsequent special indorsement

MERCANTILE LAW

(b) to bring any action thereon that the indorser could bring; (c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement. (1) Restrictive – Such indorsement either: (a) Prohibits further negotiation of instrument (b) Constitutes indorsee as agent of indorser (c) Vests title in indorsee in trust for another [Sec 36, NIL] RIGHTS OF RESTRICTIVE INDORSEE (a) Receive payment (b) Bring any action thereon that the indorser could bring. (c) Transfer his rights as such indorsee, but all subsequent indorsees acquire only the title of first indorsee under restrictive indorsement. [Sec 37, NIL] (2) Non-restrictive

AS TO KIND OF LIABILITY ASSUMED BY INDORSER Section 38, NIL. Qualified indorsement. - A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument.

AS TO TITLE TRANSFERRED Section 36, NIL. When indorsement restrictive. An indorsement is restrictive which either: (a) Prohibits the further negotiation of the instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement restrictive.

(1) Qualified (a) Constitutes indorser as mere assignor of title (b) Made by adding the words “without recourse” [Sec. 38, NIL]. (c) But this does not mean that the transferee only has the rights of an assignee; transfer remains a negotiation and transferee can still be a holder capable of acquiring a title free from defenses of prior parties. (d) Effects:

Section 37, NIL. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon the indorsee the right: (a) to receive payment of the instrument;

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(i) Relieves the qualified indorser of his liability to pay the instrument should the maker be unable to pay (ii) The qualified indorser does not guarantee the solvency of the maker, but merely his legal title to the instrument (iii)The instrument may still be further negotiated; no effect on its negotiability (2) Non-qualified

AS TO PRESENCE/ABSENCE EXPRESS LIMITATIONS

MERCANTILE LAW

(3) Irregular – Where a person, not otherwise a party to the instrument, places thereon his signature in blank before delivery, he is liable as indorser

Rights of the Holder DEFINITION OF A HOLDER Section 191, NIL. Definition and meaning of terms. - In this Act, unless the contract otherwise requires: x---x "Holder" means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof;

OF

Section 39, NIL. Conditional indorsement. Where an indorsement is conditional, the party required to pay the instrument may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally. (1) Conditional (a) Additional condition annexed to indorser’s liability; such condition must be expressed (b) Where an indorsement is conditional, a party required to pay the instrument may disregard the condition, and make payment to the indorsee or his transferee, whether condition has been fulfilled or not. (c) But any person to whom an instrument so indorsed is negotiated, will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally. [Sec. 39, NIL] (2) Unconditional

A holder is a payee or indorsee of a bill or note who is in possession of it, or the bearer thereof [Sec. 191, NIL). He has the following rights [Sec. 51, NIL]: (1) To sue on the instrument in his own name  Unindorsed intruments: Section. 49, NIL. Transfer without indorsement; effect of. Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made.  Note: This section applies only to an instrument payable to the order of the transferor. This cannot apply to bearer instruments.  Cancellation of indorsement: Section 48, NIL. Striking out indorsement. The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument.  Indorsement by agent: Section 20, NIL. Liability of person signing as agent, and so forth. Where the instrument contains or a person adds to his signature words

OTHER KINDS OF INDORSEMENT

(1) Absolute – One by which the indorser binds himself to pay, upon no other condition than the failure of prior parties to do so, and of due notice to him of such failure (2) Joint – Where instrument payable to the order of two or more payees or indorsees not partners, all must indorse, unless the one indorsing has authority to endorse for the others [Sec. 41, NIL]

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indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability. (2) Payment in due course to the holder discharges instrument

MERCANTILE LAW

WHO ARE HDCS: (1) Holder in due course (HDC) under Sec. 52, NIL (2) HDC under Sec. 58, NIL: A holder who DERIVES title to the instrument through a HDC has all the rights of the latter even though he himself satisfies none of the requirements of due course holding HDC under Sec. 59, NIL (presumption): Every holder is deemed prima facie to be a holder in due course

HOLDER IN DUE COURSE (HDC)

Sec. 191 of the NIL defines holder as the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. The word “holder” in the first clause of Sec. 52 and in the second subsection thereof may be replaced by the definition in Sec. 191 so as to read a holder in due course as a payee or an indorsee in possession, etc. [De Ocampo v. Gatchalian, 1961]

Section 52, NIL. What constitutes a holder in due course. - A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

THE SIGNIFICANCE OF DUE COURSE HOLDING

 A holder in due course can acquire a better title than his predecessors because he takes the instrument free from any defect of title of prior parties. He is furthermore free from defenses available to prior parties among themselves [Campos].  A holder not in due course, on the other hand, takes the instrument subject to all defenses because he is treated as a transferee of a nonnegotiable paper. Real defenses, however, which attach to the instrument itself would be available even against a holder in due course [Campos].  When is the question of whether a holder is a holder in due course relevant. It should be kept in mind that the question of whether a holder is a holder in due course or not is signifant only when there is an existing defense between prior parties [Campos].

Section 58, NIL. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were nonnegotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter. Section 59, NIL. Who is deemed holder in due course. - Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title.

RIGHTS OF A HOLDER IN DUE COURSE Section 51, NIL. Right of holder to sue; payment. The holder of a negotiable instrument may to sue thereon in his own name; and payment to him in due course discharges the instrument.

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Section 57, NIL. Rights of holder in due course. A holder in due course holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon.

MERCANTILE LAW

inserted in a negotiable instrument without which the same will not be complete. MATERIAL PARTICULARS Section 125, NIL. What constitutes a material alteration. - Any alteration which changes: (a) Date (b) Sum payable, either for principal or interest (c) Time or place of payment (d) Number or relations of the parties (e) Medium or currency in which payment is to be made (f) Or which adds a place of payment where no place of payment is specified (g) Or any other change or addition which alters the effect of the instrument in any respect

Section 58, NIL. When subject to original defense. - In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were nonnegotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.

The items enumerated under Sec. 125 of the NIL are material particulars.

(1) To sue on the instrument in his own name [Sec. 51, NIL] (2) To receive payment on the instrument [Sec. 51, NIL] (3) Holds instrument free of any defect of title of prior parties [Sec. 57, NIL] (4) Free from defenses available to prior parties among themselves [Sec. 57, NIL] (5) May enforce payment of instrument for full amount, against all parties liable [Sec. 57, NIL]

(2) That he became the holder of it before it was overdue and without notice that it had been previously dishonored, if such was the fact Section 53, NIL. When person not deemed holder in due course. - Where an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course. “OVERDUE” – THE FOLLOWING CANNOT BE HDCS: (a) A holder who became such after the date of maturity of the instrument [instrument is overdue; Sec. 53, NIL]; (b) In case of demand instruments: a holder who negotiates it after an unreasonable length of time after its issue [Sec. 53, NIL] (c) Instruments with fixed maturity but subject to acceleration: ultimate date of maturity is the date of maturity for the purpose of determining whether a purchaser is a HDC (d) Undated instruments: Prima facie presumption that it was negotiated before it was overdue [Sec. 45, NIL]

REQUISITES OF A HOLDER IN DUE COURSE [SEC. 52, NIL] Sec. 52, NIL. What constitutes a holder in due course. A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

Notes: (1) An overdue instrument is still negotiable, but it is subject to the defenses (real and personal) existing at the time of the transfer. (2) As to what constitutes a reasonable time, regard is to be had to the nature of the

That the instrument is complete and regular upon its face (1) It is incomplete when it is wanting in any material particular or particular proper to be

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instrument, the usage of trade or business with respect to such instrument, and the facts of the particular case. (Sec. 193, NIL) (3) An instrument is not invalid for the reason only that it is ANTE-DATED OR POSTDATED provided it is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery (Sec. 12, NIL).

MERCANTILE LAW

“Actual knowledge” What constitutes notice of defect. To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. [Sec. 56, NIL] That at the time it was negotiated to him he had no NOTICE of any infirmity in the instrument or defect in the title of the person negotiating it

THAT HE TOOK IT IN GOOD FAITH AND FOR VALUE “Value” (1) Any consideration sufficient to support a simple contract [Sec. 25, NIL]. (2) An antecedent or pre-existing debt constitutes value, whether the instrument is payable on demand or at a future time [Sec. 25, NIL]

Section 55, NIL. When title defective. - The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud.

“Holder for value” (1) Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time [Sec. 26, NIL]; and (2) Where the holder has a lien on the instrument, he is deemed a HFV to the extent of his lien [Sec .27, NIL]. (3) The holder is a holder for value only to the extent that the consideration agreed upon has been paid, delivered, or performed. [Sundiang and Aquino]

Section 56, NIL. What constitutes notice of defect. - To constitutes notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. WHAT CONSTITUTES NOTICE OF DEFECT OR BAD FAITH Under Section 56, in order to constitute notice, the holder must: (a) have ACTUAL and not merely constructive knowledge of the defect; OR (b) have acted in bad faith [Campos]

Presumption:  Every negotiable instrument is deemed prima facie issued for valuable consideration; and every person whose signature appears thereon is deemed to have become a party thereto for value [Sec. 24, NIL].  Such presumption cannot be overcome by the petitioner’s bare denial of receipt of the consideration. [Bayani vs. People, 2004]

Gross negligence IN ITSELF would not constitute notice since it is not the equivalent of actual knowledge nor of bad faith [Campos].

“Good faith” Holder must have taken the instrument in good faith and that at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

The question of good faith or bad faith is a question of fact which must be determined in accordance with the particular circumstances of each case [Campos].

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“Suspicious circumstances” General rule: A purchaser of an instrument is not required to investigate every suspicious circumstance; failure to investigate such circumstances does not constitute him as being in bad faith or having a notice of defect [Campos].

MERCANTILE LAW

(2) instrument is negotiated in breach of faith, or fraudulent circumstances NOTICE of infirmity or defect – actual knowledge of the infirmity or defect OR knowledge of such facts that his action in taking the instrument amounted to bad faith [Sec.56, NIL]

Rationale: The general principle that a purchaser who has knowledge of certain facts is put on inquiry does not operate to its full extent in the law of negotiable instruments. Negotiable instruments are usually issued in pursuance of commercial transactions where time is of the essence. To require investigation of every suspicious circumstance would hamper their function of facilitating exchange; thus negligence in tracking down a suspicious circumstance which would put a prudent man on inquiry is not of itself sufficient to prevent recovery [Campos].

RIGHT of a transferee who receives NOTICE of any infirmity or defect BEFORE he has PAID THE FULL amount for the instrument. He will be deemed a HDC only to the extent of the amount therefore paid by him [Sec.54, NIL]

DEFENSES AGAINST THE HOLDER PRESUMPTION IN FAVOR OF DUE COURSE HOLDING

Every holder is deemed prima facie to be a holder in due course [Sec. 59, NIL]. (1) BURDEN SHIFTS when it is shown that the title of any person who has negotiated the instrument was defective. Holder MUST then PROVE that he or some person under whom he claims acquired the title as a holder in due course. (2) But the last mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. [Sec. 59, NIL]

Exceptions: (a) Suspicious circumstances TOGETHER WITH other circumstances, may be admitted as evidence of bad faith. (b) Where the suspicious circumstances are so cogent and obvious  A check with 2 parallel lines in the upper left hand corner means that it could only be deposited and may not be converted to cash. Consequently, such circumstance should put the payee on inquiry and upon him devolves the duty to ascertain the holders’ title to the check or the nature of his possession. Failing in this respect, the payee is declared guilty of gross negligence amounting to legal absence of good faith and as such the consensus of authority is to the effect that the holder of the check is not a holder in good faith. [State Investment House vs. IAC, 1989]

HOLDER NOT IN DUE COURSE

(1) One who became a holder of an instrument without any, some or all of the requisites under Sec. 52 of the NIL (2) With respect to demand instruments, if it is negotiated an unreasonable length of time after its issue, the holder is deemed not a holder in due course. [Sec. 53, NIL] (3) Rights of a holder not in due course [Sec. 51, NIL]: (a) To sue on the instrument under in his own name (b) To enforce the instrument

“Defective title” Title is NOT defective when at the time it was negotiated to him, he had NO notice of: (1) any infirmity in instrument (2) any defect in title of person negotiating

The only disadvantage of a holder who is not a holder in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable. [Chan Wan vs. Tan Kim (1960)]

Title is DEFECTIVE when [Sec. 55, NIL] (1) instrument/signature obtained by fraud, duress, force or fear or other unlawful means OR for an illegal consideration; or

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Liabilities of Parties

(2) Engages that he will pay the amount of the instrument to the holder or to any subsequent indorser who may be compelled to pay the same if the instrument be dishonored upon due presentment and proceedings on dishonor be taken,

Primary liability: The unconditional promise attaches the moment the maker makes the instrument while the acceptor’s assent to the unconditional order attaches the moment he accepts the instrument. No further act is necessary in order for the liability to accrue. Presentment for payment is all that is necessary.

PARTIES

PRIMARILY

[SEC. 60 AND 62]

MERCANTILE LAW

Limiting liability: Drawer may insert in the instrument an express stipulation negativing/limiting his own liability to the holder.

LIABLE

INDORSERS

The following indorsers assume the liability to pay the instrument: (1) General or Unqualified Indorser; and (2) Irregular Indorser

Persons who by the terms of the instrument are absolutely required to pay the same

MAKER [SEC. 60]

GENERAL OR UNQUALIFIED INDORSER

Promises to pay according to the tenor of the instrument (promissory note)

[SEC. 66]

Engages that he will pay the amount of the instrument to the holder or to any subsequent indorser who may be compelled to pay the same if the instrument be dishonored upon due presentment and proceedings on dishonor be taken.

ACCEPTOR [SEC. 62]

 Upon acceptance of the bill of exchange, engages to pay the bill according to the tenor of the acceptance.  Unconditionally liable; he is duty-bound to pay the holder at date of maturity, WON holder demands payment from him, and he is not relieved from liability even if the instrument should become overdue due to failure of holder to make such demand.

Who is a General or Unqualified Indorser? Every person who indorses WITHOUT qualification [Sec. 66] A person placing his signature upon an instrument other than as a maker, drawer, or acceptor unless he indicates by appropriate words his intention to be bound in some other capacity [Sec. 63].

Note: Until he accepts the bill of exchange, the drawee assumes no liability to pay the instrument.

A person, who places his signature on an instrument negotiable by delivery, incurs all the liabilities of an indorser [Sec. 67].

PARTIES SECONDARILY LIABLE Secondary liability: A party secondarily liable is not bound to pay unless the following have been fulfilled: (1) Due presentment or demand to the primary party (2) Dishonor by such party (3) Notice of dishonor to secondary party, and, in cases of foreign bills of exchange, protest of the bill

Note: A qualified indorser does not assume the liability to pay the instrument since he is merely an assignor of the title to the instrument. However, he becomes liable once he breaches a warranty. Who is a qualified indorser? One who is constituted as a mere assignor of the title to the instrument by adding to his signature the words "without recourse" or any words of similar import.

DRAWER [SEC. 61]

(1) Engages that the instrument will be accepted or paid, or both, according to its tenor on due presentment;

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MERCANTILE LAW

IRREGULAR INDORSER When a person not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as an indorser, in accordance with these rules: (1) Instrument payable to order of 3rd person: liable to payee and to all subsequent parties (2) Instrument payable to the order of maker/drawer, or payable to bearer: liable to all parties subsequent to maker/drawer (3) Signs for accommodation of payee: liable to all parties subsequent to payee [Sec. 64]

(a) His existence (b) Genuineness of his signature (c) Capacity and authority to draw the instrument (2) As to the payee, the acceptor admits: (a) His existence (b) His then capacity to indorse [Sec. 62]

ORDER OF LIABILITY AMONG INDORSERS

GENERAL INDORSER’S WARRANTIES

The acceptor is precluded from setting up certain defenses by reason of his warranties like the defense that the drawer is a minor or the signature of the drawer is forged. [Aquino]

[SEC. 68]

(1) Among themselves: liable prima facie in the order they indorse, but proof of another agreement admissible (2) As to the Holder: Holder may sue any of the indorsers, regardless of order of indorsement (3) Joint payees/indorsees deemed to indorse solidarily

(1) That the instrument is genuine in and in all respects what it purports to be (2) That he has a good title to it (3) That all prior parties had capacity to contract (4) That the instrument is, at the time of his indorsement, valid and subsisting [Sec. 66] These warranties are in favor of all subsequent holders in due course. [Ang Tiong v. Ting, 1968]

Warranties

QUALIFIED INDORSER’S WARRANTIES

The primary or secondary liability of the parties should be distinguished from their warranties. (1) Primary or secondary liability of the parties makes them liable to pay the sum certain in money stated in the instrument. (2) Warranties are affirmations of the fact on the part of the parties that impose no direct obligation to pay in the absence of breach thereof. [Aquino]  In case of breach of warranties, the person who breached the same may either be liable or he may be barred from asserting a particular defense.

(1) That the instrument is genuine in and in all respects what it purports to be (2) That he has a good title to it (3) That all prior parties had capacity to contract (4) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. [Sec. 68]

Presentment for Payment PRESENTMENT MEANS

MAKER’S WARRANTIES

(1) The production of a Bill of Exchange to the drawer or acceptor for payment; or (2) The production of a Promissory Note to the party liable for payment.

(1) The maker admits the existence of the payee AND (2) His then capacity to indorse [Sec. 60]

DATE AND TIME OF PRESENTMENT

DRAWER’S WARRANTIES (1) The drawer admits the existence of the payee AND (2) His then capacity to endorse

(1) Bearing fixed maturity/not payable on demand – on the day it falls due if day of maturity falls on Sunday or a holiday, the instruments falling due or becoming payable on Saturday are to be presented for payment

ACCEPTOR’S WARRANTIES (1) As to the drawer, the acceptor admits:

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on the next succeeding business day [Sec. 85] (2) Payable on demand – within a reasonable time after its issue, iv at the option of the holder, may be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday [Sec. 85] (3) Demand bill of exchange – within a reasonable time after the last negotiation. [Sec. 71]

MERCANTILE LAW

(2) Partners – presentment for payment may be made to any one of them, even though there has been a dissolution of the firm (3) Several persons, not partners (joint debtors) – presentment for payment must be made to them all

DISPENSATION WITH PRESENTMENT FOR PAYMENT

When Excused: (1) Where, after the exercise of reasonable diligence, presentment cannot be made; (2) Where the drawee is a fictitious person; (3) By waiver of presentment, express or implied. [Sec. 82]

Note: Although presentment was made within a reasonable time from last negotiation, it may have been made within an unreasonable time from issuance. Thus holder may still not be a holder in due course under Sec. 71.

DISHONOR BY NON-PAYMENT

NECESSITY OF PRESENTMENT FOR PAYMENT

The instrument is dishonored by non-payment when: (1) It is duly presented for payment and payment is refused or cannot be obtained; or (2) Presentment is excused and the instrument is overdue and unpaid [Sec. 83].

When necessary: In order to charge the drawer and indorsers [Sec. 70] When NOT necessary: (1) To charge the person primarily liable on the instrument [Sec. 70] (2) To charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. [Sec. 79] (3) To charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented. [Sec. 80] (4) When the bill of exchange has previously been dishonored by non-acceptance and has not been subsequently accepted

In case of waiver of protest, whether in the case of a foreign bill of exchange or other NI – deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor [Sec. 111]

Notice of Dishonor

Notice given by holder or his agent to party or parties secondarily liable that the instrument was dishonored by: (1) Non-acceptance by the drawee of a bill; or (2) Non-payment by the acceptor of a bill; or (3) Non-payment by the maker of a note [Sec. 89]

PARTIES TO WHOM PRESENTMENT FOR PAYMENT SHOULD BE MADE

Requisites: (1) Given by holder or his agent, or by any party who may be compelled by the holder to pay [Sec. 90] (2) Given to secondary party or his agent [Sec. 97] (3) Given within the periods provided by law [Sec. 102] (4) Given at the proper place [Secs. 103 and 104]

General rule: Presentment for payment must be made to the person primarily liable on the instrument or if he is absent or inaccessible, to any person found at the place where the presentment is made. Exceptions: Where the person primarily liable is/are: (1) Dead – presentment for payment must be made to his personal representative

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MERCANTILE LAW

If given by the indorser [Sec. 93]: (1) Holder (2) All parties subsequent to the party to whom notice is given.

PARTIES TO BE NOTIFIED (1) Non-acceptance (bill) – to persons secondarily liable, namely, the drawer and indorsers as the case may be (2) Non-payment (both bill and note) – to indorsers

PARTIES WHO MAY GIVE NOTICE OF DISHONOR

Note: Notice must be given to persons secondarily liable. Otherwise, such parties are discharged. Notice may be given to the party himself or to his agent.

The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given. [Sec. 90]

WHEN GIVEN

Notice may be given as soon as the instrument is dishonored [Sec. 102]

WHO SHOULD GIVE [SEC. 90]

(1) Holder (2) Agent or representative of holder. (3) Any party who may be compelled to pay like indorsers. (4) Agent of any party who may be compelled.

WHEN NOT NECESSARY TO GIVE TO DRAWER Notice of dishonor is not required to be given to the drawer in any of the following cases: (1) Drawer and drawee are the same; (2) Drawee is a fictitious person or not having the capacity to contract; (3) Drawer is the person to whom the instrument is presented for payment; (4) The drawer has no right to expect or require that the drawee or acceptor swill honor the instrument; (5) Where the drawer has countermanded payment [Sec. 114]

EFFECT OF NOTICE

 Notice of dishonor is required to charge parties secondarily liable.  Upon valid notice of dishonor, immediate right of recourse against the indorser arises. It is as if the indorser becomes primarily liable in the sense that the holder need not claim payment from the person primarily liable [Sundiang and Aquino].

WHEN NOT NECESSARY TO GIVE TO INDORSER

FORM OF NOTICE [SEC. 96]

 The notice may be: (1) In writing; or (2) Merely oral  The notice may be given in any terms which: (1) Sufficiently identify the instrument; and (2) Indicate that it has been dishonored by non-acceptance or non-payment  It may in all cases be given by delivering it personally or through the mails

Notice of dishonor is not required to be given to an indorser in the following cases: (1) Drawee is a fictitious person or does not have the capacity to contract, and indorser was aware of that fact at the time he indorsed the instrument; (2) Indorser is the person to whom the instrument is presented for payment; (3) Instrument was made or accepted for his accommodation. (Sec. 115)

WAIVER

 Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied. [Sec. 109]  Where the waiver is embodied in the instrument itself, it is binding upon all parties;

WHO WILL BENEFIT

If given by or on behalf of the holder [Sec. 92]: (1) All subsequent holders (2) All prior parties (as to holder) who have a right of recourse against the party to whom it is given.

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but, where it is written above the signature of an indorser, it binds him only. [Sec. 110]

BY PAYMENT IN DUE COURSE (ASKED IN 2000) Payment is made in due course when it is made at or after the maturity of the payment to the holder thereof in good faith and without notice that his title is defective. [Sec. 88]

DISPENSATION WITH NOTICE (1) When party to be notified knows about the dishonor, actually or constructively [Secs. 114117] (2) If waived [Sec. 109] (3) When after due diligence, it cannot be given [Sec. 112].

Requisites: (1) Payment must be made at or after maturity. (2) Payment must be made to the holder. (3) Payment must be made in good faith and without notice that holder’s title is defective.  If payment is made before maturity and the note is negotiated to a HDC, the latter may recover on the instrument.  Payment to one of several payees or indorsees in the alternative discharges the instrument, but payment to one of several joint payees or joint indorsers is not a discharge. The party receiving payment must have been authorized by others to receive payment.

EFFECT OF FAILURE TO GIVE NOTICE

 Failure to give notice to parties secondarily liable discharges such parties  An omission to give notice of dishonor by nonacceptance does not prejudice the rights of a holder in due course subsequent to the omission [Sec. 117]

Discharge of Negotiable Instrument

BY WHOM MADE:

(1) payment in due course by or on behalf of principal debtor (2) payment in due course by party accommodated where party is made/ accepted for accommodation

Discharge: The release of all parties, whether primary or secondary, from the obligation on the instrument. It renders the instrument without force and effect and, consequently, nonnegotiable [De Leon]

DISCHARGE OF INSTRUMENT

MERCANTILE LAW

BY INTENTIONAL CANCELLATION

NEGOTIABLE

 A cancellation made unintentionally or under a mistake or without the authority of the holder, is inoperative.  But where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority. [Sec. 123]

A negotiable instrument is discharged: (1) By payment in due course by or on behalf of the principal debtor; (2) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (3) By the intentional cancellation thereof by the holder; (4) By any other act which will discharge a simple contract for the payment of money; (5) When the principal debtor becomes the holder of the instrument at or after maturity in his own right. [Sec. 119]

BY OTHER ACTS THAT DISCHARGE A SIMPLE CONTRACT FOR PAYMENT OF MONEY

Any other act which discharges a simple contract for payment of money [Art. 1231 of the Civil Code], ex. issuance of a renewal note (novation).

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(b) and he may strike out his own and all subsequent indorsements, and again negotiate instrument, except: where it is payable to order of 3rd party and has been paid by drawer or where it’s made/accepted for accommodation and has been paid by party accommodated (7) By taking a qualified acceptance

BY REACQUISITION OF PRINCIPAL DEBTOR IN HIS OWN RIGHT Principal debtor becomes holder of instrument at or after maturity in his own right

BY MATERIAL ALTERATION Material alteration without assent of all parties liable avoids instrument except as against party to alteration and subsequent indorsers [Sec. 124]

RIGHT OF PARTY WHO DISCHARGED INSTRUMENT

Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regards to all prior parties, and he may strike out his own and all subsequent indorsements, and again negotiate the instrument, except: (1) Where it is payable to the order of a third person, and has been paid by the drawer; (2) Where it was made or accepted for accommodation, and has been paid by the party accommodated. [Sec. 121]

DISCHARGE OF PARTIES SECONDARILY LIABLE GROUNDS UNDER SEC. 120

A person secondarily liable on the instrument is discharged: (1) By any act which discharges the instrument; (2) By the intentional cancellation of his signature by the holder; (3) By the discharge of a prior party; (4) By a valid tender or payment made by a prior party; (5) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is expressly reserved; (6) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved. [Sec. 120]

RENUNCIATION [SEC. 122]

BY

HOLDER

 The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument.  Renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon  Renunciation does not affect the rights of an HDC without notice

OTHER GROUNDS

(1) Failure to make due presentment [Secs. 70, 144] (2) Failure to give notice of dishonor (3) Certification of check at instance of holder (4) Reacquisition by prior party (5) Where instrument negotiated back to a prior party, such party may reissue and further negotiate, but not entitled to enforce payment against any intervening party to whom he was personally liable (6) Where instrument is paid by party secondarily liable, it is not discharged, but (a) the party so paying it is remitted to his former rights as regard to all prior parties

Material Alteration CONCEPT

 Any change in the instrument which affects or changes the liability of the parties in any way.  Any alteration which changes the date, sum payable, time or place of payment, number of relation of the parties, or medium of currency of payment where none is specified or which alters the effect of the instrument in any

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respect [PNB v. CA, GR No. L-26001, Oct. 21, 1968]  An alteration is said to be material if it alters the effect of the instrument. In other words, a material alteration is one which changes the items which are required to be stated under Sec. 1 of the NIL [ibid.]

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(3) Must not express that the drawee will perform his promise by and other means than the payment of money

KINDS OF ACCEPTANCE (1) General – assents without qualification to the order of the drawer (2) Qualified – which in express terms varies the effect of the bill as drawn: (a) Conditional – makes payment by the acceptor dependent on the fulfillment of a condition therein stated (b) Partial – an acceptance to pay part only of the amount for which the bill is drawn. (c) Local – an acceptance to pay only at a particular place. (d) Qualified as to time (e) The acceptance of some one or more of the drawees but not of all. [Sec. 141]

CHANGES IN THE FOLLOWING CONSTITUTE MATERIAL ALTERATIONS [SEC. 125]

(1) Date (2) Sum payable, either for 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 (6) That which adds a place of payment where no place of payment is specified (7) Any other change or addition which alters the effect of the instrument in any respect.

PROOF OF ACCEPTANCE [SUNDIANG AND AQUINO]

EFFECT OF MATERIAL ALTERATION

The written acceptance may be in the instrument itself or in a separate instrument. However, under Sec. 133, “the holder of a bill presenting the same for acceptance may require the acceptance be written on the bill, and, if such request is refused, may treat the bill as dishonored”

(1) Alteration by a party – Avoids the instrument except as against the party who made, authorized, or assented to the alteration and subsequent indorsers. However, if an altered instrument is negotiated to a HDC, he may enforce payment thereof according to its original tenor regardless of whether the alteration was innocent or fraudulent. (2) Alteration by a stranger (spoliation) the effect is the same as where the alteration was made by a party wherein a HDC can recover on the original tenor of the instrument [Sec. 124].

Effects: When an acceptance is written on a paper than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value.

MANNER EXPRESS ACCEPTANCE

Must be in writing and signed by the drawee and must not express that the drawee will perform his promise by any other means than the payment of money. [Sec. 132] If request for a written acceptance is refused, the holder may treat the bill as dishonored [Sec. 133]

Acceptance DEFINITION The signification by the drawee of his assent to the order of the drawer [Sec. 132]

IMPLIED ACCEPTANCE

REQUISITES [SEC. 132]:

(1) If the drawee refuses to return the instrument within 24 hours after it was delivered for acceptance. (2) If the drawee destroys the same.

(1) Must be in writing (2) Signed by the drawee

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(3) If the drawee makes an unconditional promise in writing before the instrument is drawn, with respect to every person who, upon the faith thereof, receives the bill for value.

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holder or he will be deemed to have assented thereto.  However, acceptance is presumed to be unqualified or absolute. [Sundiang and Aquino]

TIME FOR ACCEPTANCE [SEC. 136]

 The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill.  The acceptance, if given, dates as of the day of presentation.

Presentment for Acceptance Requisites: (1) By the holder, or by some person authorized to receive payment on his behalf; (2) At a reasonable hour on a business day; (3) At a proper place as herein defined; (4) To the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made.

RULES GOVERNING ACCEPTANCE Q: What is the implication of payment without acceptance by a drawee? A: Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance. This provision applies with equal force in case the drawee pays a bill without having previously accepted it. His actual payment of the amount in the check implies not only his assent to the order of the drawer and a recognition of his corresponding obligation to pay the aforementioned sum, but also, his clear compliance with that obligation. Actual payment by the drawee is greater than his acceptance, which is merely a promise in writing to pay. The payment of a check includes its acceptance. [FEBTC vs. Gold Palace Jewellery Co,, Nachura, 2008]

General rule: Presentment for acceptance is not necessary in order to render any party to the bill liable. [Sec. 143, last par.]

WHEN PRESENTMENT FOR ACCEPTANCE NECESSARY Presentment for acceptance must be made: (1) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (2) Where the bill expressly stipulates that it shall be presented for acceptance; or (3) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. [Sec. 143]

RIGHT TO UNQUALIFIED ACCEPTANCE

 The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance.  Where a qualified acceptance is taken, the drawers and indorsers are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently assent thereto.  When the drawer or indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the

Note: It is not necessary to present a check for acceptance because it is not one of those required under Sec. 143.

WHEN PRESENTMENT FOR ACCEPTANCE EXCUSED Presentment for acceptance is excused and a bill may be treated as dishonored by nonacceptance in either of the following cases: (1) Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill.

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(2) Where, after the exercise of reasonable diligence, presentment cannot be made. (3) Where, although presentment has been irregular, acceptance has been refused on some other ground. [Sec. 148]

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(4) Before the bill is overdue (5) To the drawee or his agent Where a bill is addressed to 2 or more drawees who are not partners – presentment must be made to them all XPT. One has authority to accept/refuse for all Where the drawee is dead – presentment may be made to his personal representative

TIME/PLACE/MANNER OF PRESENTMENT WHEN MADE

Where the drawee has been adjudged a bankrupt or insolvent or has made an assignment for the benefit of creditors – presentment may be made to him or to his trustee or assignee.

A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of Sections 72 and 85 of this Act. When Saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o'clock noon on that day. [Sec. 146]

EFFECT OF FAILURE TO MAKE PRESENTMENT [SEC. 144] Failure to make presentment discharges the drawer and all indorsers [Sec. 144].

WHAT CONSTITUTES SUFFICIENT PRESENTMENT?

Presentment for payment, to be sufficient, must be made: (1) By the holder, or by some person authorized to receive payment on his behalf; (2) At a reasonable hour on a business day; (3) At the proper place as herein defined [see Sec. 73]; (4) To the person primarily liable on the instrument or if he is absent or inaccessible, to any person found at the place where the presentment is made. [Sec. 72]

DISHONOR BY NONACCEPTANCE When dishonored by non-acceptance: A bill is dishonored by non-acceptance: (1) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or cannot be obtained; or (2) When presentment for acceptance is excused and the bill is not accepted. [Sec. 149] Duty of holder: Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by non-acceptance or he loses the right of recourse against the drawer and indorsers. [Sec. 150]

Time of maturity: Every negotiable instrument is payable at the time fixed therein without grace. When they day of maturity falls upon Sunday, or a holiday, the instrument is payable on the next succeeding business day. Instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day, except that instrument payable on demand may, at the option of the holder be presented for payment before twelve o’clock noon on Saturday when that entire day is not a holiday. [Sec. 85]

Effect: When a bill is dishonored by nonacceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary. [Sec. 151]

Promissory Notes

HOW MADE [SEC. 145]

A promissory note is: (1) An unconditional promise in writing (2) Made by one person to another (3) Signed by the maker

In general: (1) By or on behalf of the holder (2) At a reasonable hour (3) On a business day

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(4) Engaging to pay on demand, or at a fixed or determinable future time (5) A sum certain in money to order or to bearer (6) Where a note is drawn to the maker's own order, it is not complete until indorsed by him. [Sec. 184]

MERCANTILE LAW

undertakes to pay it at any future time when presented for payment [Sec. 187] (a) Certification is equivalent to acceptance. [Sec. 187] (b) Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability. [Sec. 188] (c) A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder unless and until it accepts or certifies the check. [Sec. 189] (5) Crossed Check – The NIL is silent with respect to crossed checks, although the Code of Commerce makes reference to such instruments.

There are originally 2 parties in a promissory note: (1) Maker – party who executes the written promise to pay. (2) Payee – party in whose favor the promissory note is made payable.

Checks DEFINITION

A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check. [Sec. 185]

Article 541 of the Code of Commerce states: “The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words ‛and company.”

KINDS (1) Cashier’s Check – One drawn by the cashier of a bank, in the name of the bank against the bank itself payable to a third person. It is a primary obligation of the issuing bank and accepted in advance upon issuance [Tan vs. CA 1994]. (2) Manager’s Check – A check drawn by the manager of a bank in the name of the bank itself payable to a third person. It is similar to the cashier’s check as to the effect and use.

Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top portion of the check [State Investment House vs. IAC, 1989]. TYPES: SPECIAL AND GENERAL The crossing may be special wherein between the two parallel lines is written the name of a bank or a business institution, in which case the drawee should pay only with the intervention of that bank or company, or crossing may be general wherein between two parallel diagonal lines are written the words "and Co." or none at all as in the case at bar, in which case the drawee should not encash the same but merely accept the same for deposit (supra).

In issuing a manager’s check, the bank assumed the liabilities of the acceptor under Sec. 62, NIL [Equitable PCI Bank v. Ong (2006)] (3) Memorandum Check – A check given by a borrower to a lender for the amount of a short loan, with the understanding that it is not to be presented at the bank, but will be redeemed by the maker himself when the loan falls due and which understanding is evidenced by writing the word “memorandum”, “memo” or “mem” on the check. (4) Certified Check – An agreement whereby the bank against whom a check is drawn

EFFECTS (1) The check may not be encashed; it may only be deposited with the bank; (2) The check may be negotiated only once to a person who has an account with the bank; and

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(3) It serves as a warning to a holder that the check has been issued for a definite purpose. [Bataan Cigar vs. CA, 1994]

PRESENTMENT FOR PAYMENT

A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank. The bank is not liable to the holder, unless and until it accepts or certifies the check. [Sec. 189]

TIME

When to present? A check must be presented for payment within reasonable time after its issue.

EFFECT OF DELAY The drawer will be discharged from liability thereon to the extent of the loss caused by the delay. [Sec. 186] Certification of checks: An agreement whereby the bank against whom a check is drawn, undertakes to pay it at any future time when presented for payment Effects: (1) Equivalent to acceptance [Sec. 187] and is the operative act that makes banks liable (2) Assignment of the funds of the drawer in the hands of the drawee [Sec. 189] (3) If obtained by the holder, discharges the persons secondarily liable thereon [Sec. 188] Refusal of drawee bank to certify: The holder has no action against the bank but he has a right of action against the drawer. The drawer in turn has right of action against the bank based on the original contact of deposit between them.

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Concept of Insurance

MERCANTILE LAW

insurance entered into between the insured and the insurer.  No policy, certificate or contract of insurance shall be issued or delivered within the Philippines unless in the form previously approved by the Commissioner.  No application form shall be used with, and no rider, clause, warranty or endorsement shall be attached to, printed or stamped upon such policy, certificate or contract unless the form of such application, rider, clause, warranty or endorsement has been approved by the Commissioner [Section 232].

 On August 15, 2013, RA 10607 was signed into law. It is a restatement of the Insurance Code [PD 612], with amendments.  While RA 10607 restated the whole law, most of the amendments touch only the administrative portion of the Code, and very little on the substantive portion.  Unless otherwise indicated, the section numbers pertain to RA 10607.

CONTRACT OF INSURANCE

 A contract of insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event.  A contract of suretyship shall be deemed to be an insurance contract only if made by a surety who or which, as such, is doing an insurance business [Section 2(a)].  A contract of insurance involves public interest. Thus, the business is regulated by the state through the requirement of license or certificate of authority [White Gold Marine Services v. Pioneer (2005)].

INSURANCE AND DISTINGUISHED

GAMBLING

A contract of insurance is a contract of indemnity and is not a wagering or gambling contract. It is based on contingency, but it is not a contract of chance for profit. Unlike gambling, in insurance contracts, one insured gains is not at the expense of the another insured. Also, a gambling contract tends to increase inequality of fortune, while an insurance contract tends to equalize fortune.

DOING OR TRANSACTING INSURANCE BUSINESS

DEFINITION

The term “doing an insurance business or transacting an insurance business” includes: (1) Making or proposing to make, as insurer, any insurance contract; (2) Making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; (3) Doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of the Insurance Code; (4) Doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of the Insurance Code.

Thus, a contract of insurance is: (1) A contract of indemnity; (2) Wherein one undertakes for a consideration; (3) To indemnify another against loss, damage, or liability; (4) Arising from an unknown or contingent event.  A contingent event is one that is not certain to take place. An unknown event is one which is certain to happen, but the time of its happening is not known. A past event may be a designated event only in cases where it has happened already but the parties do not know about it, e.g., prior loss of a ship at sea (applicable only to marine insurance).

FORM

The fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefor, shall not be deemed conclusive to show that the making

 A policy of insurance is different from the contract of insurance. The policy is the formal written instrument evidencing the contract of

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thereof does not constitute the doing or transacting of an insurance business (Section 2(b)).

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Bangko Sentral ng Pilipinas or any of its branches under such rules and regulations which the Commissioner and the Bangko Sentral ng Pilipinas may promulgate. To engage in bancassurance arrangement, a bank is not required to have equity ownership of the insurance company. No insurance company shall enter into a bancassurance arrangement unless it possesses all the requirements as may be prescribed by the Commissioner and the Bangko Sentral ng Pilipinas.  No insurance product, whether life or non-life, shall be issued or delivered pursuant to a Bancassurance arrangement, unless in the form previously approved by the Commissioner (Section 375).  Personnel tasked to present and sell insurance products within the bank premises shall be duly licensed by the Commissioner and shall be subject to the rules and regulations of this Act (Section 376).  This is introduced in RA 10607 amending the Insurance Code.

General rule: An insurance business consists in undertaking, for a consideration, to indemnify another against loss, damage or liability arising from an unknown or contingent event. Exception: Although the business is not formally designated as one of insurance and no profit is derived or no separate or direct consideration is received, it is deemed to be doing an insurance business if it undertakes any of the activities included in the term “doing an insurance business or transacting an insurance business.” Philippine Health Care Providers Inc. v. CIR (2009) has stated that: (1) Contracts of law firm with clients whereby in consideration of periodical payments, the law firm promises to represent such clients in all suits for or against them are not insurance contracts; (2) A contract by which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a physician against all suits for damages for malpractice is one of insurance, and the corporation will be deemed as engaged in the business of insurance.

PRE-NEED PLANS

 Pre-need plans are contracts, agreements, deeds or plans for the benefit of the planholders which provide for the performance of future services, payment of monetary considerations or delivery of other benefits at the time of actual need or agreed maturity date, as specified therein, in exchange for cash or installment amounts with or without interest or insurance coverage and includes life, pension, education, interment and other plans, instruments, contracts or deeds [Section 4(b), RA 9829 (Pre-Need Code)].  Pre-need plans are not governed by the Insurance Code but by the Pre-Need Code of the Philippines. They are not considered as insurance contracts because even pre-need plans can be insured, thereby implying that the two are not the same.  Pre-need plans are considered as securities and used to be governed by the Securities Regulation Code. They are not considered as insurance contracts because it is not an insurance for an unknown or contingent event

GOVERNING LAW

 The Insurance Code primarily governs insurance contracts, unless there is a special law which specifically govern (e.g., insurance contract under the RA 1161 or Social Security Act), in which case, the Insurance Code governs subsidiarily.  Matters not expressly provided for in the Insurance Code and special laws are regulated by the Civil Code.

BANCASSURANCE

 RA 10607 introduced provisions governing bancassurance.  The term bancassurance shall mean the presentation and sale to bank customers by an insurance company of its insurance products within the premises of the head office of such bank duly licensed by the

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but an event certain happening at a certain time.  Nevertheless, the Insurance Commissioner shall have the primary and exclusive power to adjudicate any and all claims involving preneed plans. If the amount of benefits does not exceed P100,000, which decision shall be final and executory [Sec. 58(a), Pre-Need Code].

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CONSIDERATION

 An insurance premium is the agreed price for assuming and carrying the risk. It is the consideration paid to the insurer for undertaking to indemnify the insured against a designated peril. It is based on probability of loss and extent of liability.  Premiums are difference from assessments. An assessment, in insurance law, is a sum specifically levied by mutual insurance companies or associations, upon a fixed and definite plan, to pay losses and expenses. While premiums are levied and paid to meet anticipated loss, assessments are collected to meet actual loss.

Elements of an Insurance Contract IN GENERAL (1) Subject matter in which the insured has an insurable interest; (2) Consideration which refers to the premium payments based on probability of loss and extent of liability; (3) Object and Purpose which is the transfer and distribution of risk of loss, damage or liability; (4) Cause which refers to an event or peril insured against; (5) A meeting of minds of the parties upon all the foregoing essentials.

OBJECT AND PURPOSE

SUBJECT MATTER

 Cause refers to an event or peril insured against.  Peril is the contingent or unknown event which may cause a loss. Its existence creates a risk and its occurrence results in loss.  The event or peril insured against must be such that its happening will: (1) Damnify or cause loss to a person having insurable interest; or (2) Create liability against him.  The unknown event may be past or future. Even if the proximate cause of the loss is a fortuitous event, the insurer may still be liable if it is the event or peril insured against [De Leon, The Insurance Code of the Philippines Annotated (2010)].

Insurance contracts serve to distribute the risk of economic loss, damage or liability among as many as possible of those who are subject to the same kind of risk. By paying premiums which inured to a general fund out of which payment will be made for an economic loss of a defined type, each member contributes to a small degree toward compensation for losses suffered by any member of the group.

CAUSE

 The insured must have an insurable interest in the subject matter of the insurance contract.  Insurable interest is the interest which the law requires the owner of an insurance policy to have in the person or thing insured. General rule: A person is deemed to have an insurable interest in the subject matter insured where he has a relation or connection with or concern in it that he will derive pecuniary or financial benefit or advantage from its preservation and will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against [Lalican v. Insular Life Ins. Co. (2009)]. Exception: The expectation of benefit from the continued life of the person insured need not be of a pecuniary nature.

MEETING OF THE MINDS

The two parties to a contract of insurance whose minds need to meet regarding the essential elements are:

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(1) The insurer or the party who assumes or accepts the risk of loss and undertakes for consideration to indemnify the insured or to pay hum a certain sum on the happening of the event or peril insured against, and (2) The insured or the person in whose favor the contract is operative and whose loss is the occasion for the payment of the insurance proceeds by the insurer  The insured is not always the person whom the proceeds are paid. Such person is the beneficiary.

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Exceptions: Insurance contracts particularly liability insurance, may be required by law in certain instances:  For motor vehicles [Sections 373-389];  For employees [Articles 168-184, Labor Code]; As a condition to granting a license to conduct business or calling affecting the public safety or welfare [De Leon (2010)]. Also, there are insurance which may arise by operation of law. Social insurance for members of the Government Service Insurance System (GSIS) and for the employees of the private sector covered by the Social Security System (SSS) is established by law.

Characteristics of an Insurance Contract

ALEATORY It is aleatory because it depends upon some contingent event. The obligation of the insurer to pay depends on the happening of an event which is uncertain, or though certain, is to occur at an indeterminate time [Article 2010, Civil Code]. However, it cannot be considered as gambling, wagering, or a contract of chance because the risk is created by the contract itself.

IN GENERAL An insurance contract is: (1) Consensual; (2) Voluntary; (3) Aleatory; (4) Executory and unilateral, but synallagmatic; (5) Conditional; (6) Contract of indemnity; (7) Contract of adhesion; (8) Personal contract; (9) Property; (10) Uberrimae fides contract (utmost good faith).

EXECUTORY AND UNILATERAL BUT SYNALLAGMATIC

 Once the insured pays the premium, the contract already takes effect. After the payment of premiums, the insurance imposes a unilateral obligation on the insurer who promise to indemnify in case of loss.  It is also synallagmatic and reciprocal such that even if the contingent event does not occur, the insurer has still provided protection against the risk. When the designated peril does not happen, the insured nevertheless gets the protection against such risk for the period covered by the insurance contract.

CONSENSUAL

It is perfected by the meeting of the minds of the parties. There must be concurrence of offer and acceptance. Unless otherwise stipulated, the policy is not essential to the existence of the contract. It merely evidences the terms and conditions thereof [Campos, Insurance (1983)].

VOLUNTARY

CONDITIONAL

General rule: It is voluntary in the sense that it is not compulsory and the parties are free to incorporate such terms and conditions they may deem convenient provided they are not contrary to law, morals, good customs, public order, or public policy.

It is conditional because it is subject to conditions, the principal of which is the happening of the event insured against. However, many other conditions are usually required (such as payments of premium or performance of other act) as precedent to the right of the insured to claim benefit under the insurance.

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nature of property and do not represent a personal agreement between the insurer and the insured. They are considered property in legal contemplation.

CONTRACT OF INDEMNITY (FOR NON-LIFE INSURANCE)

The insured who has insurable interest over the property is only entitled to recover the amount of actual loss sustained. The burden is upon him to establish the amount of such loss.

UBERRIMAE FIDES CONTRACT

Each party is required to deal with each other in utmost good faith and disclose conditions affecting the risk, of which he is aware, or any material fact which the applicant knows and those which he ought to know. Violation of this duty gives the aggrieved party the right to rescind the contract. Where the aggrieved party is the insured, the bad faith of the insurer will preclude it from denying liability on the policy based on breach of warranty [Campos (1983)].

General rule: This applies only to property insurance. An insurance contingent on the life of a person is not an indemnity contract because the value of a life is immeasurable. Exception: However, where the basis of the insurable interest of the policy owner on the life of the insured is a commercial relationship (e.g., creditor-debtor, mortgagor/guarantormortgagee, supporter and supportee), then such contract is an indemnity contract

Classes

CONTRACT OF ADHESION (FINE PRINT RULE)

MARINE INSURANCE DEFINITION

Insurance contracts are already presented to the insured in its printed form on a “take it or leave it” basis. What is needed only is the adhesion of the insured for the contract to be made. Such contracts of adhesion are valid. However, ambiguity in them shall be interpreted liberally in favor of the insured and strictly against the insurer who prepared the same

Marine insurance is a type of transportation insurance which is concerned with the perils of property in, or incidental to, transit as opposed to property perils at a generally fixed location. Marine insurance includes: (1) Insurance against loss of or damage to: (a) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects, disbursements, profits, moneys, securities, choses in action, instruments of debts, valuable papers, bottomry, and respondentia interests and all other kinds of property and interests therein, in respect to, appertaining to or in connection with any and all risks or perils of navigation, transit or transportation, or while being assembled, packed, crated, baled, compressed or similarly prepared for shipment or while awaiting shipment, or during any delays, storage, transhipment, or reshipment incident thereto, including war risks, marine builder’s risks, and all personal property floater risks; (b) Person or property in connection with or appertaining to a marine, inland marine, transit or transportation insurance,

PERSONAL CONTRACT

 Each party takes into consideration the character, conduct and/or credit of the other and in making of the contract, each is enjoined by law to deal with the other in utmost good faith [Campos (1983)].  The insured cannot assign, before the happening of the loss, his rights under a property policy to others without the consent of the insurer [Sections 20, 58, and 83].  Property insurance is personal in the sense that it is the damage to the personal interest not the property that is being reimbursed.

PROPERTY (FOR LIFE INSURANCE)

Life insurance policies, unlike property insurance, are generally assignable or transferrable [Section 81] as they are in the

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including liability for loss of or damage arising out of or in connection with the construction, repair, operation, maintenance or use of the subject matter of such insurance (but not including life insurance or surety bonds nor insurance against loss by reason of bodily injury to any person arising out of ownership, maintenance, or use of automobiles); (c) Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise; and (d) Bridges, tunnels and other instrumentalities of transportation and communication (excluding buildings, their furniture and furnishings, fixed contents and supplies held in storage); piers, wharves, docks and slips, and other aids to navigation and transportation, including dry docks and marine railways, dams and appurtenant facilities for the control of waterways. (2) Marine protection and indemnity insurance, meaning insurance against, or against legal liability of the insured for loss, damage, or expense incident to ownership, operation, chartering, maintenance, use, repair, or construction of any vessel, craft or instrumentality in use of ocean or inland waterways, including liability of the insured for personal injury, illness or death or for loss of or damage to the property of another person [Section 101].

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transportation. It also covers risks of lake, river or other inland waterway transportation and other waterborne perils outside those covered by ocean marine insurance.

BOTTOMRY AND DISTINGUISHED

RESPONDENTIA

 Bottomry loan is a loan that is obtained for the value of the vessel on a voyage and the lender is repaid only if the vessel subject of the loan arrives safely at its destination. The insurable interest of a ship owner on its bottomed boat is the difference between the amount of the loan and the value of the boat. Thus, if the amount of the loan does not cover the total value of the boat, the owner can still insured the boat.  Respondentia loan is a loan that is obtained as security for the value of the cargo to be transported and the lender is repaid only if the cargo arrives safely at its destination.

RISKS

PERILS OF THE SEA  Ocean marine insurance protects ships at sea and the cargo or freight on such ships from standard “perils of the sea” or “perils of navigation” which includes casualties arising from the violent action of the elements and does not cover ordinary wear and tear or other damage usually incident to the voyage. The mere fact that an injury is due to violence of some marine force does not necessarily bring it within the protection of the policy if such violence was not unusual or unexpected.  Perils of the sea or perils of navigation include only those casualties due to the unusual violence or extraordinary causes connected with navigation. It has been said to include only such losses as are of extraordinary nature or arise from some overwhelming power which cannot be guarded against by the ordinary exertion of human skill or prudence, as distinguished from the ordinary wear and tear of the voyage and from injuries suffered by the vessel in consequence of her not being unseaworthy [Sundiang and Aquino, Reviewer on Commercial Law (2013)].  The phrase also extends to barratry which refers to the willful and intentional act on the part of the master or the crew, in pursuance of

DIVISIONS

Marine insurance has two major divisions: (1) Ocean marine insurance insures against risk connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in movable property, may be exposed during a certain voyage or a fixed period of time. Its scope includes: (a) Ships or hulls; (b) Goods or cargoes; (c) Earnings such as freight, passage money, commissions, or profits; and (d) Liability (protection and indemnity insurance). (2) Inland marine insurance covers the land or over the land transportation perils of property shipped by railroads, motor trucks, airplanes, and other means of

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some unlawful or fraudulent purpose, without the consent of the owner, and to the prejudice of his interest (e.g., burning the ship, unlawfully selling the cargo).  No honest error of judgment or mere negligence, unless criminally gross, can be barratry [Roque v. IAC (1985)].

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specie, is so damaged as not to be worth, when repaired, the cost of the repairs; (2) American rule, which states that there is constructive total loss when it is so damaged that the costs of repairs would exceed onehalf of the value of the thing as acquired; also known as the “fifty percent rule;” (3) Philippine rule, which states that the insured may not abandon the thing insured unless the loss or damage is more than threefourths of its value.

PERILS OF THE SHIP Perils of the ship are those which cause a loss which in the ordinary course of events, results: (1) From the ordinary, natural and inevitable action of the sea; (2) From ordinary wear and tear of the ship; and (3) From the negligent failure of the ship’s owner to provide the vessel with the proper equipment to convey the cargo under ordinary conditions.

Thus, under Section 141, a person insured by a contract of marine insurance may abandon the thing insured, or any particular portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when the cause of the loss is a peril insured against: (1) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from the peril; (2) If it is injured to such an extent as to reduce its value more than three-fourths; (3) If the thing insured is a ship, and the contemplated voyage cannot be lawfully performed without incurring either an expense to the insured of more than threefourths the value of the thing abandoned or a risk which a prudent man would not take under the circumstances; or (4) If the thing insured, being cargo or freightage, and the voyage cannot be performed, nor another ship procured by the master, within a reasonable time and with reasonable diligence, to forward the cargo, without incurring either an expense to the insured of more than three-fourths the value of the thin abandoned or a risk which a prudent man would not take under the circumstances. But freightage cannot in any case be abandoned unless the ship is also abandoned.

 In the absence of stipulation, the risks insured against are only perils of the sea [Go Tiaco y Hermanos v. Union Ins. Society of Canton (1919)].  However, in an all risk policy, all risks are covered unless expressly excepted. The burden rests on the insurer to prove that the loss is caused by a risk that is excluded [Filipino Merchants Ins. Co. v. CA (1989)].

LOSS

Loss may be total or partial. Total loss may be actual or constructive. (1) Actual total loss is the irretrievable loss of the thing or any damage which renders the thing valueless to the owner for the purpose for which he held it. It can be presumed from the continued absence of the ship without being heard of for a period of time depending on the circumstances of the case. (2) Constructive total loss or “technical total loss” is one in which the loss, although not actually total, is of such character that the insured is entitled, if he thinks fit, to treat it as total by abandonment.

ABANDONMENT

DEFINITION Abandonment, in marine insurance, is the act of the insured by which, after a constructive total loss, he declares the relinquishment to the insurer of his interest in the thing insured [Section 140].

As to when a constructive total loss exists, three rules exist: (1) English rule, which states that there is constructive total loss when the subject matter of the insurance, while still existent in

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CONDITIONS Aside from the requirement under Section 141 already mentioned: (1) An abandonment must be neither partial nor conditional [Section 142]; (2) An abandonment must be made within a reasonable time after receipt of reliable information of the loss, but where the information is of a doubtful character, the insured is entitled to a reasonable time to make inquiry [Section 142]; (3) Abandonment is made by giving notice thereof to the insurer, which may be done orally, or in writing: Provided, That if the notice be done orally, a written notice of such abandonment shall be submitted within seven days from such oral notice [Section 145]; (4) Abandonment must be absolute and total.

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with all the chances of recovery and indemnity [Section 148]; (2) If a marine insurer pays for a loss as if it were an actual total loss, he is entitled to whatever may remain of the thing insured, or its proceeds or salvage, as if there had been a formal abandonment [Section 149]; (3) Upon an abandonment, acts done in good faith by those who were agents of the insured in respect to the thing insured, subsequent to the loss, are at the risk of the insurer, and for his benefit [Section 150].

AVERAGE

Average is defined as the extraordinary or accidental expense incurred during the voyage for the preservation of the vessel, cargo or both and all the damages to the vessel and cargo from the time it is loaded and the voyage commenced until it ends and the cargo is unloaded.

 No notice of abandonment is required for recovery of loss in cases of actual total loss.  Where the information upon which an abandonment has been made proves incorrect, or the thing insured was so far restored when the abandonment was made that there was in fact no total loss, the abandonment becomes ineffectual.

There are two kinds of averages: (1) Gross or general averages; and (2) Simple or particular averages. Gross averages include damages and expenses which are deliberately caused by the master of the vessel or upon his authority, in order to save the vessel, her cargo, or both at the same time from a real and known risk. This must be borne equally by all of the interests concerned in the venture.

CHARACTERISTICS Thus, a valid abandonment has the following characteristics: (1) There must be an actual relinquishment by the person insured of his interest in the thing insured; (2) There must be a constructive total loss; (3) The abandonment be neither partial nor conditional; (4) It must be made within a reasonable time after receipt of reliable information of the loss; (5) It must be factual; (6) It must be made by giving notice thereof to the insurer which may be done orally or in writing; and (7) The notice of abandonment must be explicit and must specify the particular cause of the abandonment.

To claim general average contributions, the requisites are: (1) There must be a common danger to the vessel or cargo; (2) Part of the vessel or cargo was sacrificed deliberately; (3) The sacrifice must be for the common safety or for the benefit of all; (4) It must be made by the master or upon his authority; (5) It must not be caused by any fault of the party asking contribution; (6) It must be successful (i.e., resulted in the saving of the vessel and/or cargo) (7) It must be necessary.

EFFECTS (1) An abandonment is equivalent to a transfer by the insured of his interest to the insurer,

Particular averages include damages and expenses caused to the vessel or her cargo,

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which have not inured to the common benefit and profit of all the persons interested in the vessel and her cargo. A particular average loss is suffered by and borne alone by the owner of the cargo or of the vessel, as the case must be.

ALTERATIONS CONDITION

MERCANTILE LAW

IN

USE

OR

(1) An alteration in the use or condition of a thing insured from that to which it is limited by the policy made without the consent of the insurer, by means within the control of the insured, and increasing the risks, entitles an insurer to rescind a contract of fire insurance [Section 170]. (2) An alteration in the use or condition of a thing insured from that to which it is limited by the policy, which does not increase the risk, does not affect a contract of fire insurance [Section 171]. (3) A contract of fire insurance is not affected by any act of the insured subsequent to the execution of the policy, which does not violate its provisions, even though it increases the risk and is the cause of the loss [Section 172].

FIRE INSURANCE DEFINITION

 Fire insurance includes insurance against loss by fire, lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies [Section 169].  A fire insurance is a contract of indemnity by which the insurer, for a stipulated premium, agrees to indemnify the insured against loss of, or damage to, a property caused by hostile fire.  Fire or other so-called “allied risks” enumerated above must be the proximate cause of the damage or loss.  Fire is oxidation which is so rapid as to produce either a flame or a glow. Spontaneous combustion is usually rapid oxidation. Fire is always caused by combustion, but combustion does not always cause fire.  The presence of heat, steam, or even smoke is evidence of fire, but taken by itself will not prove the existence of fire.  Fire cannot be considered a natural disaster or calamity since it almost always arises from some acts of man or by human means. It cannot be an act of God unless caused by lightning or a natural disaster or casualty not attributable to human agency [Phil. Home Assurance Corp. v. CA (1996)].

Thus, in order that the insurer may rescind a contract of fire insurance for any alteration made in the use or condition of the thing insured, the following requisites must be present: (1) The use or condition of the thing is specifically limited or stipulated in the policy; (2) Such use or condition as limited by the policy is altered; (3) The alteration is made without the consent of the insurer; (4) The alteration is made by means within the control of the insured; and (5) The alteration increased the risk. Every contract of insurance is made with reference to the conditions surrounding the subject matter of the risk. Thus, there is an implied promise or undertaking on the part of the insured that he will not change the premises or the character of the business carried there so as to increase the risk of loss by fire.

RISKS

 Hostile fire is one that escapes from the place where it was intended to burn and ought to be, or one which remains completely within its proper place but because of the unsuitable materials used to light it, it becomes inherently dangerous and uncontrollable. This kind of fire will make the insurer liable.  Friendly fire is one that burns in a place where it is intended to burn and ought to be like fire burning in a stove or a lamp.

MEASURE OF INDEMNITY

(1) In an open policy, only the expense necessary to replace the thing lost or injured in the condition it was at the time of the injury will be paid;

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(2) In a valued policy, the parties are bound by the valuation, in the absence of fraud or mistake, similar to marine insurance.

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kinds of insurance (e.g., robbery and theft insurance).  It is governed by the general provisions applicable to all types of insurance plus stipulations in the insurance contract

 In the absence of express valuation in a fire insurance policy, the insured is only entitled to recover the amount of actual loss sustained and the burden of proof is upon him to establish the amount of such loss by preponderance of evidence.  Where the face value of the policy is less than the agreed valuation, then even in case of total loss, the insured can only recover up to the policy’s face value, which is always the maximum limit of the insurer’s liability [Tan Chuco v. Yorkshire Fire & Life Ins. Co. (1909)].  In an open policy, the actual loss, as determined, will represent the total indemnity due the insured except only that the total indemnity shall not exceed the total value of the policy [Devt. Ins. Corp. v. IAC (1986)].

INTENTIONAL AND ACCIDENTAL INJURY DISTINGUISHED

 “Intentional” implies the exercise of the reasoning faculties, consciousness and volition. Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling. If the injuries suffered by the insured clearly resulted from the intentional act of the third person, the insurer is relieved from liability as stipulated.  “Accidental” means that which happens by chance or fortuitously, without intention or design, which is unexpected, unusual and unforeseen. The terms do not, without qualification, exclude events resulting in damage due to fault, recklessness or negligence of third parties. The concept is not necessarily synonymous with “no fault.” It may be utilized simply to distinguish intentional or malicious acts from negligent or careless acts of man.

CASUALTY INSURANCE DEFINITION

 Casualty insurance is insurance covering loss or liability arising from accident or mishap, excluding certain types of loss which by law or custom are considered as falling exclusively within the scope of other types of insurance such as fire or marine. It includes, but is not limited to, employer’s liability insurance, motor vehicle liability insurance, plate glass insurance, burglary and theft insurance, personal accident and health insurance as written by non-life insurance companies, and other substantially similar kinds of insurance [Section 176].  Casualty insurance includes all forms of insurance against loss or liability arising from accident or mishap excluding certain types of loss or liability which are not within the scope of other types of insurance such as fire, marine, suretyship and life. It includes, but is not limited to, employer’s liability insurance, workmen’s compensation insurance, public liability insurance, motor vehicle liability insurance, plate glass insurance, burglary and theft insurance, personal accident and health insurance as written by non-life insurance companies, and other substantially similar

DIVISIONS

Casualty insurance has two general divisions: liability and indemnity insurance. LIABILITY INSURANCE Under policies of this type, the insurer assumes the obligation to pay the third party in whose favor the liability of the insured arises. The liability of the insurer attaches as soon as the liability of the insured to the third party is established. It covers liability incurred from quasi-delict or criminal negligence but cannot cover deliberate criminal acts. INDEMNITY INSURANCE Under this kind of insurance, no action will lie against the insurer unless brought by the insured for loss actually sustained and paid by him. Liability of the insurer attaches only after the insured has paid his liability to the third party.

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obligor’s assets and assumes a regular party to the undertaking.  It is limited or fixed to the amount of the bond.  What is unique to a contract of suretyship is that when the obligee accepts the bond, the bond becomes valid and enforceable whether or not the premium has been paid by the obligor unlike in an insurance contract where payment of premium is necessary for the contract to be valid. If the obligee has not yet accepted, then payment of premium is still necessary for the contract of suretyship to be valid.

NO ACTION CLAUSE

 A no action clause is a requirement in a policy of liability insurance which provides that suit and final judgment be first obtained against the insured; that only thereafter can the person injured recover on the policy [Guingon v. Del Monte (1967)].  But, the no-action clause cannot prevail over the Rules of Court provisions which are aimed at avoiding multiplicity of suits. Parties (the insured and the insurer) may be joined as defendants in a case commenced by the third party claiming under a liability insurance, as the right to relief in respect to the same transactions is alleged to exist [see Section 5, Rule 2 and Section 6, Rule 3].

LIFE INSURANCE DEFINITION

SURETYSHIP

 Life insurance is insurance on human lives and insurance appertaining thereto or connected therewith.  Every contract or undertaking for the payment of annuities including contracts for the payment of lump sums under a retirement program where a life insurance company manages or acts as a trustee for such retirement program shall be considered a life insurance contract for purposes of the Insurance Code [Section 181].  An insurance upon life may be made payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the continuance or cessation of life.  Every contract or pledge for the payment of endowments or annuities shall be considered a life insurance contract for purposes of the Insurance Code [Section 182].

 A contract of suretyship is an agreement whereby a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of a third party called the oblige [Section 175].  It is an agreement whereby a surety guarantees the performance or undertakes to answer, under specified terms and conditions, for the debt, default or miscarriage of the principal or obligor, such as failure to perform, or breach of trust, negligence and the like, in favor of a third party.  It shall be deemed as insurance contract if the surety’s main business is that of suretyship, and not where the contract is merely incidental to any other legitimate business or activity of the surety.  The contract of a surety is evidenced by a writing called “surety bond” which is essentially a promise to guarantee the obligation of the obligor. In turn, the obligor executes an “indemnity agreement” in favor of the insurer.  It is an accessory contract unlike a contract of insurance which is the principal contract itself.  The liability of the surety or sureties under a bond is joint and several, or solidary. This means that upon the default of the principal obligor, the surety becomes primarily liable. Unlike a guarantor, a surety is not entitled to the benefit of exhaustion of the principal

TYPES

INDIVIDUAL LIFE It is an insurance on human lives and insurance appertaining thereto or connected therewith. It may be made payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the continuation or cessation of life GROUP LIFE It is a blanket policy covering a number of individuals who are usually a cohesive group (e.g., employees of a company) and subjected to a common risk. No medical examination is

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usually required of each person insured (in contrast to individual life insurance). Group insurance covers a number of persons in a single contract.

the contract terminates and the insurer is not liable; (4) Pure endowment policy, where the insurer pays the insured if the insured survives a specified period. If the insured dies within the period, the insurer is released from liability and unless the contract otherwise provides, need not reimburse any part of the premiums paid; (5) Endowment policy, where the insured is paid the face value of the policy if he outlives the designated period. If he dies within said period, the insurer pays the proceeds to the beneficiary. This is a combination of term policy and pure endowment policy.

INDUSTRIAL LIFE Industrial life insurance is that form of life insurance under which the premiums are payable either monthly or oftener, if the face amount of insurance provided in any policy is not more than 500 times that of the current statutory minimum daily wage in the City of Manila, and if the words industrial policy are printed upon the policy as part of the descriptive matter [Section 235]. MICROINSURANCE Microinsurance is a financial product or service that meets the risk protection needs of the poor, where: (1) The amount of contributions, premiums, fees or charges, computed on a daily basis, does not exceed 7.5% of the current daily minimum wage rate for nonagricultural workers in Metro Manila; and (2) The maximum sum of guaranteed benefits is not more than 1,000 times of the said current daily minimum wage rate [Section 187].

RISKS

DEATH OR SURVIVAL  It may be made payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the continuation or cessation of life [Campos (1983)].  Death of the insured must be proven by the beneficiary before the insurer can be made to pay. SUICIDE Insurer is liable in the following cases: (1) If committed after two years from the date of the policy’s issue or its last reinstatement. Any stipulation extending the 2-year period is void; (2) If committed in a state of insanity regardless of the date of the commission unless suicide is an excepted peril; (3) If committed after a shorter period provided in the policy.

No insurance company or mutual benefit association shall engage in the business of Microinsurance unless it possesses all the requirements as may be prescribed by the Commissioner, who shall issue such rules and regulations governing microinsurance [Section 188].

EXAMPLES POLICIES

OF

LIFE

MERCANTILE LAW

INSURANCE

Since suicide is contrary to the laws of nature and the ordinary rules of conduct, it is never presumed. The burden of proving lies with the insurer who seeks to avoid liability under a life policy excepting it from coverage [Campos (1983)].

(1) Ordinary or whole life policy, where the insurer agrees to pay the face value of the policy upon the death of the insured; (2) Limited payment plan, where the insured agrees to pay premiums only for a specified number of years. If he survives such period, he stops paying any further premium, and when he dies, the insurer pays the proceeds to his beneficiary; (3) Term plan, where the insurer’s liability arises only upon the death of the insured within the agreed term or period. If the insured survives,

DEATH AT THE HANDS OF THE LAW Death at the hands of the law (e.g., legal execution) is one of the risks assumed by the insurer under a life insurance policy in the absence of a valid policy exception [Vance on Insurance (1951)].

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KILLING BY THE BENEFICIARY General rule: The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal accomplice or accessory in willfully bringing about the death of the insured. In such event, the other beneficiaries so named shall receive their share and divide among them the forfeited share of the “guilty” beneficiary. In the absence of other beneficiaries, proceeds shall be paid according to the policy contract, and if silent, it shall be paid to the estate of the insured [Section 12)]

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insurance contract cannot have any effect [Campos (1983)].  The insurer’s liability is direct and primary so the insurer need not wait for final judgment in the criminal case to be liable. Its purpose is to give immediate financial assistance to victims of motor vehicle accidents and/or their dependents, especially if they are poor, regardless of the financial capability of motor vehicle owners or operators responsible for the accident sustained [Shafer v. Judge, RTC (1988)].  The claimants/victims may be a passenger or a third party. The insured may be the party at fault as against claims of third parties (third party liability) or the victim of the contingent event. The following clauses are relevant to compulsory motor vehicle liability insurance: (1) Authorized driver clause is a stipulation in a motor vehicle insurance which provides that the driver, other than the insured owner, must be duly licensed to drive the motor vehicle, otherwise the insurer is excused from liability; (2) Theft clause is a stipulation including theft as one of the risks insured against. If there is such a provision and the vehicle was unlawfully taken, the insurer is liable under the theft clause and the authorized driver clause does not apply. The insured can recover even if the thief has no driver’s license.

Exceptions: (1) Accidental killing; (2) Self-defense; (3) Insanity of the beneficiary at the time he killed the insured; (4) Negligence. Note: Conviction of the beneficiary is necessary before his interest in the insurance policy is forfeited in favor of the others indicated in Section 12.

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

 Compulsory motor vehicle liability insurance is a policy of insurance or guaranty in cash or surety bond to indemnify the death, bodily injury, and/or damage to property of a thirdparty or passenger, as the case may be, arising from the use of a motor vehicle [Section 387].  It is a requisite for registration or renewal of registration of a motor vehicle by every land transportation operator or owner [Section 390]. It is the only compulsory insurance under the Insurance Code.  It is a species of compulsory insurance that provides for protection coverage that will answer for legal liability for losses and damages for bodily injuries or property damage that may be sustained by another arising from the use and operation of motor vehicle by its owner. It applies to all vehicles whether public or private vehicles.  To the extent that motor vehicle insurance is compulsory, it must be a liability policy, and the provision making it merely an indemnity

Insurable Interest IN GENERAL

 In general, an insurable interest is that interest which a person is deemed to have in the subject matter insured, where he has a relation or connection with or concern in it, such that the person will derive pecuniary benefit or advantage from the preservation of the subject matter insured and will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against. The existence of an insurable interest gives a person the legal right to insure the subject matter of the policy

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of insurance [Lalican v. Insular Life Ins. (2009)].  An insurable interest is one of the most basic and essential requirements in an insurance contract. As such, it may NOT be waived by stipulation. Absence of insurable interest renders the insurance contract void.  The insurable interest need not always be pecuniary in nature.

not exist during the intervening period or from the time between it the policy takes effect and the loss occurs. The alienation of insured property will not defeat a recovery if the insured has subsequently reacquired the property and possesses an insurable interest at the time of loss [Womble v. Dubuque Fire &Marine Ins. Co.].

CHANGE OF INTEREST

Change of interest means the absolute transfer of the property insured.

Ratio: (1) As a deterrence to the insured. A policy issued to a person without interest is a mere wager policy or contract and is void for illegality. A wager policy is obviously contrary to public interest. There is a moral hazard in removing insurable interest as a requirement for the validity of an insurance policy in that: (a) It allows the insured to have an interest in the destruction of the subject matter rather than in its preservation. [Myer v. Grand Lodge] (b) It affords a temptation or an inducement to the insured, having nothing to lose and everything to gain, to bring to pass the event upon happening of which the insurance becomes payable. [White v. Equitable Nuptial Benefit Union] (2) As a measure of limit of recovery. The insurable interest is the measure of the upper limit of his provable loss under the contract. Sound public policy requires that insurance should not provide the insured means of making a net profit from the happening of the event insured against.

General rule: A change of interest in the thing insured does not transfer the policy, but suspends the insurance to an equivalent extent until the interest in the thing and the interest in the insurance policy are vested in the same person. Thus, the contract is not rendered void but is merely suspended. Exceptions: (1) Life, health, and accident insurance; (2) A change of interest in the thing insured after the occurrence of an injury which results in a loss does not affect the policy; (3) A change in the interest in one or more of several things, separately insured by one policy, such as a conveyance of one or more things, does not affect the policy with respect to the others not so conveyed; (4) A change of interest by will or succession on the death of the insured. The death of the insured does not avoid insurance policy. It does not affect the policy except his interest passes to his heir or legal representative who may continue the insurance policy on the property by continuing paying premiums; (5) A transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to the others. This does not avoid the insurance. It will avoid the policy only as to the selling partners or coowners but not as to others. The rule applies even though it has been agreed that the insurance cease upon alienation of the thing. (6) Automatic transfers of interest in cases in which the policy is so framed that it will inure to the benefit of whosoever may become the owner of the interest insured during the circumstance of the risk. It is an exception to the general rule that upon maturity, the proceeds of a policy shall be given exclusively

WHEN INSURABLE INTEREST SHOULD EXIST Policy

Insurable interest required Effectivity Intervening Occurrence of period of loss insurance

Life or health



Property



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

Insurable interest over life/health may be lost after the insurance takes effect as long as it exists at the time the insurance takes effect. On the other hand insurable interest property need

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to the proper interest if the person in whose name or for whose benefit it is made. (7) An express prohibition against alienation in the policy [Article 1306, Civil Code], in which case alienation will not merely suspend the contract but avoid it entirely.



IN LIFE/HEALTH INSURANCE Every person has an insurable interest in the life and health: (1) Of himself, of his spouse and of his children; (2) Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; (3) Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and (4) Of any person upon whose life any estate or interest vested in him depends [Section 10]. Unless the interest of a person insured is susceptible of exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy.

 



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life of the cestui que vie. Mere relationship is a sufficient interest to be insured. The insurable interest must be based on moral and legal grounds. Such interest exists whenever the insured has a responsible expectation of deriving benefit from the continuation of the life of the other person or of suffering detriment through its termination. There is no insurable interest in the life of an illegitimate spouse. A creditor may take out insurance on the life of his debtor but his insurable interest is only up to the amount of the debt. An assignee of the insurance contract is not required to have insurable interest in the life of the insured, for to require such interest in him is to diminish the investment value of the contract to the owner. Note, however, that assignment is different from a change in the designated beneficiary. When the beneficiary is the principal, accomplice or accessory in willfully bringing about the death of the insured, interest of beneficiary in life insurance policy is forfeited.

BENEFICIARY A beneficiary is the person who is named or designated in a contract of life, health, or accident insurance as the one who is to receive the proceeds or benefits which become payable, according to the terms of the contract, if the insured risk occurs.

Life insurance policies may be divided into two general classes: (1) Insurance upon one’s life; (2) Insurance upon life of another.

IN LIFE INSURANCE

INTEREST IN ONE’S OWN LIFE  Cestui que vie is the insured himself. The insured can designate anyone to be the beneficiary of the policy.  Each has unlimited interest in his own life, whether the insurance is for the benefit of himself or another.  The beneficiary designated need not have any interest in the life of the insured when person takes out policy on his own life. But if a person obtains a policy on the life of another and names himself as the beneficiary, he must have insurable interest therein.

General rule: A person may designate a beneficiary, irrespective of the beneficiary’s lack of insurable interest, provided he acts in good faith and without intent to make the transaction merely a cover for a forbidden wagering contract [De Leon (2010)]. Exceptions: Any person who is forbidden from receiving any donation under Article 739, Civil Code cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him [Article 2012, Civil Code]. Article 739 provides that the following donations are void: (1) Those made between persons who were guilty of adultery or concubinage at the time of the donation;

INTEREST IN LIFE OF ANOTHER  In life insurance, unless based on commercial relationship, the policy owner does not necessarily have “pecuniary interest” on the

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(2) Those made between persons found guilty of the same criminal offense, in consideration thereof; (3) Those made to a public officer or his wife, descendants and ascendants, by reason of his office.

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(2) An inchoate interest founded on an existing interest; or (3) An expectancy, coupled with an existing interest in that out of which the expectancy arises [Section 14].  The insurable interest may be in the property itself (e.g., ownership), or any relation thereto (e.g., interest of a trustee or a commission agent), or liability in respect thereof (e.g., interest of a carrier or depository of goods). The relation of the insured to the property is such that he will be benefited by its continued existence or will suffer a direct pecuniary loss by its destruction.  An existing interest may be a legal title or equitable title. Examples of those having existing interest are owners as regards their properties, trustees in the case of the seller of property not yet delivered, mortgagors over the property mortgaged, and lessor, lessee and sub-lessee over the property leased.  An inchoate interest must be founded on existing interests. It exists but is incomplete or unripe until the happening of an event. Examples of inchoate interests are the interest of stockholders with respect to dividends in case of profits and shares in the assets, and the interest of a partner in the properties belonging to the partnership.  An expectancy must be coupled with an existing interest out of which the expectancy arises. For example, a farmer who planted crops has insurable interest over his harvest which can be expected.  A mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any valid contract for it, is not insurable.  A mere hope or expectation of benefit which may be frustrated by the happening of some event uncoupled with any present legal right will not support a contract of insurance. A son has no insurable interest over the property of his father because such is just a mere expectancy and has no legal basis before he inherits such property.  Insurable interest in property may be based on a perfected contract of sale, vesting an equitable title even before delivery of the

 The insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in said policy.  In general, the policy owner can change the beneficiary without the consent of such beneficiary. However, when this right to change is expressly waived, the consent of the beneficiary is necessary. This means that despite the waiver, he can still change the beneficiary provided he obtained the beneficiary’s consent.

INTEREST IN HEALTH INSURANCE

General rule: Interest in the life or health of a person must exist when the insurance takes effect (at inception), but need not exist thereafter or when the loss occurs. Exceptions: (1) In the case of a creditor’s insurance taken on the life of the debtor, insurable interest disappears once the debt has been paid. At this point, the creditor/insured can no longer recover on the policy; (2) In the case of a company’s insurance taken on the life of an employee, insurable interest disappears once the employee leaves the company, in which case, the company can no longer recover on the policy.

TRANSFER OF POLICY

 Interest can be transferred even without the notice to the insurer of such transfer or bequest, unless there is a stipulation to the contrary.  There is no right of subrogation in life insurance, because it is not a contract of indemnity.

IN PROPERTY INSURANCE An insurable interest in property may consist in: (1) An existing interest;

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goods [Filipino Merchants Ins. Co. v. CA (1989)].  When the seller retains ownership only to insure that the buyer will pay its debt, the risk of loss is borne by the buyer. Insurable interest in property does not imply a property interest in, or a lien upon, or possession of the subject matter of the insurance, and neither ownership nor a beneficial interest is requisite to the existence of such an interest. Anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction [Gaisano Cagayan Ins. v. Ins. Co. of North America, (2006)].

MERCANTILE LAW

MEASURE OF INDEMNITY

 Being a contract of indemnity, the measure of insurable interest in property is the extent to which the insured might be damnified by the loss of injury thereof. The insured cannot recover a greater value than that of his actual loss because it would be a wagering policy contrary to public policy and void.  Thus, a mortgagor has an insurable interest equal to the value of the mortgaged property and a mortgagee, only to the extent of the credit secured by the mortgage.

INTEREST IN LIFE AND PROPERTY DISTINGUISHED Life

TIME OF EXISTENCE

General rule: Interest in property insured must exist both at inception and at time of loss, but not in the intervening period.

Property Extent

Limited to actual value of the interest thereon

Exceptions: (1) A change in interest over the thing insured after the loss contemplated. The insured may sell the remains without prejudice to his right to recover; (2) A change of interest in one or more several distinct things, separately insured by one policy. This does not avoid the insurance as to the others; (3) A change in interest by will or succession upon the death of the insured; (4) A transfer of interest by one of several partners, joint owners, or owners in common who are jointly insured. The acquiring coowner has the same interest; his interest merely increases upon acquiring other coowners interest.

Unlimited (save in life insurance effected by a creditor on the life of the debtor – amount of debt only)

Existence Must exist when the insurance takes effect and when the loss occurs, BUT need not exist in the meantime

Must exist at the time the insurance takes effect, BUT need not exist thereafter

Expectation of benefit to be derived Must basis

have

legal

Need not have legal basis

Interest of beneficiary Must have insurable interest over the thing insured

TRANSFER OF POLICY

 Interest cannot be transferred without the insurer’s consent, because the insurer has approved the policy based on the personal qualifications and insurable interest of the insured.  When there is an express prohibition against alienation in the policy, and there is alienation, the contract of insurance is not merely suspended but avoided.

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Need not have insurable interest over the life of the insured if the insured himself secured the policy. But if the insurance was obtained by the beneficiary, the latter must have insurable interest over the life of the insured (Sundiang and Aquino (2013))

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DOUBLE AND OVER INSURANCE; REINSURANCE

sum total of all the policies issued, each insurer is liable for the amount of his policy.

DOUBLE INSURANCE

DOUBLE AND OVER INSURANCE DISTINGUISHED

Double insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest [Section 95].

Double insurance

Over insurance

Amount of insurance Amount of insurance may or may not exceed exceeds the value of the the value of the insured’s insurable insured’s insurable interest interest

Requisites: (1) The same person is insured; (2) Two or more insurers insuring separately; (3) The same subject matter; (4) The same interest insured; and (5) The same risk or peril insured against

There are always There may be one or several insurers more insurers

REINSURANCE

 A contract of reinsurance is one by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance [Section 97].  Reinsurance is a contract of indemnity. It has been referred to as “an insurance of an insurance.” There is no relationship between the reinsurer of the reinsurance contract and the insured under the original insurance contract.

 Double insurance is not prohibited under the law, unless the policy contains a stipulation to the contrary. Usually, insurance policy contains “other insurance clause” which requires disclosure of other existing insurance policy. In such case, non-disclosure will avoid the policy. Such clause is intended to prevent over insurance and thus avert the perpetration of fraud.  If over-insured, then the insurers will pay prorata (or whatever is stated in contract) in case of loss.  Nonetheless, under Section 64(f), an insurer may cancel an insurance policy, other than life, based on a “[d]iscovery of other insurance coverage that makes the total insurance in excess of the value of the property insured” subject to the requirement of prior notice.  Also, under Section 83, “[i]n case of an over insurance by several insurers other than life, the insured is entitled to a ratable return of the premium, proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk.”

ORIGINAL INSURANCE CONTRACT AND REINSURANCE CONTRACT DISTINGUISHED The original insurance contract is separate and distinct from the reinsurance contract. Insurance contract is independent from the reinsurance contract. Insurance contract covers indemnity against damages. Reinsurance covers indemnity against liability. REINSURANCE TREATY AND POLICY DISTINGUISHED  A reinsurance treaty is an agreement between two insurance companies whereby one agrees to cede and the other to accept reinsurance business pursuant to provisions specified in the treaty [De Leon (2010)].  A reinsurance policy is a contract of indemnity one insurer makes with another to protect the first insurer from a risk it has already assumed.  Reinsurance treaties and reinsurance policies are not synonymous. Treaties are contracts for

RULES FOR PAYMENT

Section 96 enunciates the principle of contribution which requires each insurer to contribute RATABLY to the loss or damage considering that the several insurances cover the same subject matter and interest against the same peril. If the loss is greater than the

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insurance; policies are contracts of insurance [Philamlife v. Auditor General (1958)].

(2) If the proceeds are less than the credit, then the mortgagee may recover from the mortgagor the deficiency. Upon payment, the insurer is subrogated to the rights of the mortgagee against the mortgagor to the extent of the amount paid.  When a mortgagor takes out an insurance for his own benefit, he can only recover from the insurer but the mortgagee has a lien on the proceeds by virtue of the mortgage. A mortgagor can make the proceeds payable to or assigned to the mortgagee.

DOUBLE INSURANCE AND REINSURANCE DISTINGUISHED Double insurance Same interest

Reinsurance Different interest

Insurer remains as the Insurer becomes the insurer insured in relation to the reinsurer Insured is a party in The original insured is interest in the not a party in the insurance contracts reinsurance contract

OPEN LOSS PAYABLE MORTGAGE CLAUSE

Property is the subject The original insurer's matter risk is the subject matter

 An open loss payable clause simply states that the proceeds of the insurance contract is payable to the mortgagee as beneficiary.  The contract, however, is procured by the mortgagor for his interest in the property. He is the party to the contract, not the mortgagee.  The acts of the mortgagor prior to the loss, which would otherwise avoid the insurance, affects the mortgagee, even if the property is in the hands of said mortgagee.

Insured has to give his Insured’s consent is not consent necessary

MULTIPLE INTERESTS PROPERTY

OR ON

MERCANTILE LAW

SEVERAL SAME

 The Insurance Code recognizes that both the mortgagor and mortgagee have each separate and distinct insurable interest in the mortgaged property and that they may take out separate policies with the same or different insurance companies. Consequently, insurance taken by one on his own name only does not inure to the benefit of the other.  The mortgagor may insure the mortgaged property in its full value but the mortgagee can insure it only in the extent of the debt secured.  When a mortgagee insures his own interest in the mortgaged property without reference to the right of the mortgagor, mortgagee is entitled to the proceeds of the policy in case of loss to the extent of his credit. (1) If the proceeds are more than the total amount of credit, then mortgagor has no right to the balance. If the proceeds are equal to the credit, then insurer is subrogated to the mortgagee’s rights and mortgagee can no longer recover the mortgagor’s indebtedness.

UNION MORTGAGE OR STANDARD MORTGAGE CLAUSE

 This clause is similar to an open loss payable clause, except that it is stipulated that the acts of the mortgagor cannot invalidate the insurance, provided that if the mortgagor fails to pay the premiums due, the mortgagee shall, on demand, pay said premiums.  When a mortgagee insured his own interest and a loss occurs, he is entitled to recover on the insurance. However, he may no longer claim against the mortgagor, for his claim is discharged up to the amount the insurer has paid him [Palileo v. Cosio (1955)].

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 When there is delay in acceptance due to the negligence of the insurance company which takes unreasonably long time before the application is processed and the applicant dies, the contract is not perfected. In this case, the insurer can be liable for damages in accordance with the “tort theory.” The insurance business is imbued with public interest, thus it is the duty of the insurer to act with reasonable promptness in acting on applications submitted to it.  The measure of damage is the face value of the policy. In life insurance, the proceeds will inure to the insured’s estate and not to the beneficiary.  The insurer is liable under the policy because its delay in formally accepting/denying the application and payment of premium is taken as an implied acceptance.

Perfection of the Insurance Contract OFFER AND CONSENSUAL

MERCANTILE LAW

ACCEPTANCE/

 An insurance contract is consensual. It is therefore perfected by mere consent. Consent is manifested by the meeting of the offer and the acceptance upon the object or the cause which are to constitute the contract.  There is an offer when the insured submits an application to the insurer. There is acceptance when the insurer approves the application. The insurance contract becomes effective upon payment of first premium, provided there has been an approval of the application.  A contract of insurance must be assented to by both parties, either in person or through their agents and so long as an application for insurance has not been either accepted or rejected, it is merely a proposal or an offer to make a contract [Perez v. CA (2000)].  Also, according to Enriquez v. Sun Life Assurance Co. (1920): (1) Submission of application, even with premium payment is a mere offer on the part of the applicant, and does not bind the insurer; (2) An insurance contract is also not perfected where the applicant dies before the approval of his application or it does not appear that the acceptance of the application ever came to the knowledge of the applicant; (3) An acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge.  The parties may impose additional conditions precedent to the validity of the policy as a contract as they see fit. Usually, it is stipulated in the application that contract shall not become binding until the policy is delivered and the first premium is paid [De Leon (2010)].

DELIVERY OF POLICY

 Delivery is the act of putting the insurance policy (the physical document) into the possession of the insured. The delivery can be a proof of the acceptance of the insurer of the offer of the insured. It is not, however, a prerequisite of a valid contract of insurance. Actual manual delivery is not necessary for the validity of the contract. Constructive delivery may be sufficient. The contract may be completed without delivery depending on the intention of the parties.  Actual delivery to the insured is not essential to give the policy binding effect as long as the insured has complied with every condition required of him [New York Life Ins. Co. v. Babcock (1898)].  There are conflicting views as to whether delivery to the agent of the insurance company can be considered delivery to the insured.  In Bradley v. New York Life Ins. (1921), the agent of the insurance company is not the agent of the insured. Thus delivery to the agent cannot be considered delivery to the insured.

PREMIUM PAYMENT

DELAY IN ACCEPTANCE

 Delay in acting on the application does not constitute acceptance even though the insured has forwarded his first premium with his application [Perez v. CA (2000)].

An insurance premium is the agreed price for assuming and carrying the risk, that is, the consideration paid an insurer for undertaking to

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indemnify the insured against the specified peril.

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NON-PAYMENT OF PREMIUM (1) Non-payment of first premium, unless waived, prevents the contract from becoming binding notwithstanding the acceptance of the application nor the issuance of the policy. (2) Non-payment of subsequent premiums does not affect the validity of the contracts unless, by express stipulation, it is provided that the policy shall in that event be suspended or shall lapse. In case of individual life insurance, the policy holder is entitled a grace period of either 30 days or one month within which payment of any premium after the first may be made. In cases of industrial life insurance, the grace period is four weeks, and where premiums are paid monthly, either 30 days or one month.

General rule: No insurance policy issued or renewal is valid and binding until actual payment of the premium [Section 77]. Any agreement to the contrary is void. Exceptions: (1) In case of life and industrial life whenever the grace period provision applies (Section 77); (2) Where there is an acknowledgment in the contract or policy of insurance that the premium has already been paid; (3) Where there is an agreement to grant the insured credit extension for the payment of the premium despite full awareness of grace period proided by law [UCPB v. Masagana Telemart (2001)]; (4) Where there is an agreement allowing the insured to pay premium in installment and partial payment has been made at the time of the loss [Makati Tuscany v. CA (1992)]; (5) Where the parties are barred by estoppel [UCPB v. Masagana Telemart (2001)].

EXCUSES FOR NON-PAYMENT

(1) Fortuitous events which render payment by the insured wholly impossible will not prevent forfeiture of the policy when the premium remains unpaid. In other words, it is not an excuse. (2) Non-payment of premiums occasioned by war causes an insurance to be not merely suspended, but is completely abrogated. It would be unjust to allow the insurer to retain the reserve value of the policy, which is the excess of the premiums paid over the actual risk carried during the years when the policy had been in force in time of war [Constantino v. Asia Life Ins. Co. (1950)].

AUTHORITY OF AGENT TO RECEIVE PREMIUM

 Where an insurer authorizes an insurance agent or broker to deliver a policy to the insured, it is deemed to have authorized said agent to receive the premium in its behalf.  The insurer is bound by its agent’s acknowledgement of receipt of payment of premium [American Home Assurance Co. v. Chua (1999)].

NON-DEFAULT OPTIONS LIFE INSURANCE

IN

The law requires that in case of life or endowment insurance, the policy shall contain a provision specifying the options to which the policy holder is entitled in the event of default in a premium payment after three full annual premiums shall have been paid [Sec 227(f)].

PAYMENT BY POST-DATED CHECK

 The payment of premium by a postdated check at a stated maturity subsequent to the loss is insufficient to put the insurance into effect.  But payment by a check bearing a date prior to the loss, assuming availability of funds, would be sufficient, even if it remains unencashed at the time of the loss. The subsequent effects of encashment would retroact to the date of the instrument and its acceptance by the creditor [Vitug, Commercial Laws and Jurisprudence (2006)].

CASH SURRENDER VALUE (CSV)

 It is the amount that the insured is entitled to receive if he surrenders the policy and releases his claims upon it. The right to CSV accrues only after three full annual premium payments. The Insured is given the right to claim the amount less than the reserve, reduced by surrender charge.

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 The cash value or cash surrender value is an amount which the insurance company holds in trust for the insured to be delivered to him upon demand. When the company’s credit for advances is paid out of the cash value or cash surrender value, that value and the company’s liability is diminished [Manufacturer’s Life Ins. v. Meer (1951)].

MERCANTILE LAW

insured because it continues the contract and all its features with full force and effect.

REINSTATEMENT OF A LAPSED LIFE INSURANCE POLICY Reinstatement of a lapsed life insurance policy is not a non-default option. It does not create a new contract, but merely revives the original policy so insurer cannot require a higher premium than the amount stipulated in the contract. It does not apply to group/industrial life insurance.

Ratio: The premium is uniform throughout a lifetime, but the risk is varied (i.e., higher risk when older, lower when young). Thus, the cost of protection is more expensive during the early years of the policy.

Requisites: (1) It must be exercised within three years from date of default; (2) The insured must present evidence of insurability satisfactory to the insurer; (3) He must pay all back premiums and all indebtedness to the insurer (4) The CSV must not have been duly paid to the insured nor the extension period expired; (5) The application must be filed during the insured’s lifetime [Andres v. Crown Life Ins. (1958)].

ALTERNATIVE TO CSV

(1) Extended insurance/term insurance, where the insured, after having paid three full annual premiums, is given the right to have the policy continued in force from date of default for a time either stated or equal to the amount of the CSV, taken as a single premium. The face value of the policy remains the same but only within the term. It is also called “term insurance” where CSV is taken as a single premium (no further payments) to extend the policy for a fixed period of time. Reinstatement is allowed if made within the term purchased; no reinstatement after the lapse of the term purchased (2) Paid-up insurance, where, after the insurance is “paid-up,” the insured who has paid three full annual premiums is given the right, upon default, to have the policy continued from the date of default for the whole period of insurance without further payment of premiums. It is also called “reduced paid-up” because in effect the policy, terms and conditions are the same but the face value is reduced to the “paid-up” value. (3) Automatic premium loan (APL), where, upon default, the insurer lends/advances to the insured without any need of application on his part, amount necessary to pay overdue premium, but not to exceed the CSV of the policy. It only applies if requested in writing by the insured either in the application or at any time before expiration of the grace period. In effect, the insurance policy continues in force for a period covered by the payment. After the period, if insured still does not resume paying his premiums, policy lapses, unless CSV still remains. If there is still CSV, APL continues until CSV is exhausted. This is beneficial for the

REFUND OF PREMIUMS Return of premiums can be made in the following cases: (1) If the thing insured was never exposed to the risks insured against, the whole premium should be refunded; (2) When the contract is voidable due to the fraud or misrepresentation of insurer or his agent, the whole premium should be refunded (3) When by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy, the whole premium should be refunded; (4) When the contract is voidable because of the existence of facts of which the insured was ignorant without his fault, the whole premium should be refunded; (5) Where the insurance is for a definite period and the insured surrenders his policy, the portion of the premium that corresponds to the unexpired time at a pro rata rate, unless a short period rate has been agreed upon and appears on the face of the policy should be return;

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(6) When there is over-insurance by several insurers, the return premiums should be proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk; (7) When rescission is granted due to the insurer’s breach of contract.

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influence of the fact upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries [Section 31].  The test is in the effect which the knowledge of the fact in question would have on the contract. It need not increase the risk or contribute to any loss or damage suffered. It is sufficient if the knowledge of it would influence the party in making the contract (De Leon (2010)).

Rescission of Insurance Contracts

EFFECTS

General rule: Concealment vitiates the contract and entitles the insurer to rescind, even if the death or loss is due to a cause not related to the concealed matter.

CONCEALMENT

 A neglect to communicate that which a party knows and ought to communicate, is called a concealment [Section 26].  A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance [Section 27].

Exceptions: (1) Incontestability clause, which clause stipulates that the policy shall be incontestable after a stated period. The incontestability clause is a mandatory provision in life policies. The policy must be payable on the death of the insured and has been in force during the lifetime of the insured for at least two years from its date of issue or of its last reinstatement; (2) Concealment after the contract has become effective, because concealment must take place at the time the contract is entered into in order that the policy may be avoided. Information obtained after the perfection of the contract is no longer necessary to be disclosed by the insured, even if the policy has not been issued. (3) Waiver or estoppel; (4) Marine insurance, where concealment of the following matters does not vitiate the entire contract, but merely exonerates the insurer from a loss resulting from the risk concealed: (a) The national character of the insured; (b) The liability of the thing insured to capture and detention; (c) The liability to seizure from breach of foreign laws of trade; (d) The want of necessary documents; and (e) The use of false and simulated papers [Section 112].

Requisites: (1) A party knows a fact which he neglects to communicate or disclose to the other; (2) Such party concealing is duty bound to disclose such fact to the other; (3) Such party concealing makes no warranty of the fact concealed; (4) The other party has not the means of ascertaining the fact concealed; (5) The fact concealed is material. Concealment may be committed by either the insurer or the insured [Qua Chee Gan v. Law Union & Rock Ins. Co. (1955); Fieldmen’s Ins. Co. v. Vda. de Songco (1968)].

PROOF OF FRAUD IN CONCEALMENT

General rule: Fraud need not be proven in order to prove concealment. Good faith is not a defense. Exception: When the concealment is made by the insured in relation to the falsity of a warranty, the non-disclosure must be intentional and fraudulent in order that the contract may be rescinded.

TEST OF MATERIALITY

 Materiality is determined not by the event, but solely by the probable and reasonable

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Note: If the applicant is aware of the existence of some circumstance which he knows would influence the insurer in acting upon his application, good faith requires him to disclose that circumstance, though unasked [Vance (1951)].

CONCEALMENT IN MARINE AND ORDINARY PRIVATE INSURANCE DISTINGUISHED Marine insurance

Ordinary insurance

Required disclosure Exact and whole truth

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 The fact of being a “mongoloid” is a material fact that needs to be disclosed [Great Pacific Life v. CA (1979)].  Mere possibility of previous hypertension is not enough to establish concealment [Great Pacific Life (1999)].

Substantial truth

Effect of concealment Concealment of the Any kind of matters specified in concealment will make Section 112 will not the insurer not liable. entirely avoid the contract but will merely exonerate the insurer from losses resulting from the risk concealed

MATTERS WHICH NEED NOT BE DISCLOSED

(1) Matters already known to the insurer [Section 30(a)); (2) Matters which each party are bound to know [Section 30(b) and Section 32]; (3) Matters of which the insurer waives communication [Section 30(c) and Section 33]; (4) Matters which prove or tend to prove the existence of a risk excluded by a warranty and which are not otherwise material [Section 30(d)]; (5) Matters which relate to a risk excepted in the policy, and which are not otherwise material [Section 30(e)]; (6) Information of the nature or amount of the interest of one insured unless if inquired upon by the insurer, except if required by Section 51 [Section 34] (7) Matters of opinion [Section 35].

CONCEALMENT IN NON-MEDICAL INSURANCE

 The waiver of medical examination in a nonmedical insurance contract renders even more material the information required of the applicant concerning the previous conditions of health and diseases suffered. The fact that the matter concealed had no bearing on the cause of death is not important because it is well settled that the insured need not die of the disease he had failed to disclose to the insurer. It is sufficient that his nondisclosure misled the insurer in forming his estimates of the risks of the proposed policy or in making inquiries [Sunlife v. Sps. Bacani (1995)].  Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid the policy even though they are untrue. Reason: The insurer cannot simply rely on those statements. He must make further inquiry [Philamcare Health Systems v. CA (2002)].

Each party to a contract of insurance is bound to know all the general causes which are open to his inquiry, equally with that of the other, and which may affect the political or material perils contemplated; and all general usages of trade [Section 32].

MATTERS WHICH MUST BE DISCLOSED EVEN IN THE ABSENCE OF INQUIRY

MISREPRESENTATION/ OMISSIONS

 Each party to a contract of insurance must communicate to the other, in good faith, all facts within his knowledge which are material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining [Section 28].

 A representation is to be deemed false when the facts fail to correspond with its assertions or stipulations [Section 44].  If a representation is false in a material point, whether affirmative or promissory, the injured

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party is entitled to rescind the contract from the time when the representation becomes false [Section 45].  There is false representation if the matter is true at the time it was made/represented but false at the time the contract takes effect [Section 44]. Corollarily, there is no false representation if the matter is true at the time the contract takes effect although false at the time it was made/represented.  A representation must be presumed to refer to the date on which the contract goes into effect [Section 42]. Thus, a representation may be altered or withdrawn before the insurance is effected but not afterwards [Section 41].  Representations are factual statements made by the insured at the time of, or prior to, the issuance of the policy, which give information to the insurer and induce him to enter into the insurance contract.

MERCANTILE LAW

EFFECTS

General rule: The injured party is entitled to rescind from the time when the representation becomes false [Section 45]. Exceptions: (1) Incontestability clause; (2) Misrepresentation after contract takes effect; (3) Waiver, made by acceptance of insurer of premium payments despite knowledge of the ground for rescission [Section 45]; (4) A representation of the expectation, belief, opinion, or judgment of the insured, although false, and even if material to the risk [Philamcare Health Systems, Inc. v. CA (2002)]; (5) Representation by insured based on information obtained from third persons (not his agent), provided the insured: (a) Has no personal knowledge of the facts; (b) Believes them to be true; and (c) Explains to the insurer that he does so on the information of others.

KINDS OF REPRESENTATIONS

(1) Affirmative, which refers to any allegation as to the existence or non-existence of a fact when the contract begins. (2) Promissory, which is any promise to be fulfilled after the contract has come into existence; or any statement concerning what is to happen during the existence of the insurance [Section 39]. A promissory representation is substantially a condition or warranty [De Leon (2010)]. (3) Oral or written [Section 36].

 A representation cannot qualify an express provision or an express warranty of insurance [Section 40] because a representation is not part of the contract but only a collateral inducement to it. However, it may qualify as an implied warranty.  There is fraud and misrepresentation when another person takes the place of the insured in the medical examination [Eguaras v. Great Eastern (1916)].  The insurer is not entitled to rescission for misrepresentation of age if the birth date on the policy leads to the conclusion that the insured is beyond the age covered and yet insurer continued to accept payment and had issued the policy. Insurer is deemed estopped [Edillon v. Manila Bankers Life (1982)].

Requisites: (1) The insured stated a fact which is untrue; (2) Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively as true without knowing it to be true and which has a tendency to mislead; (3) Such fact in either case is material to the risk. Like in concealment, fraud or intent is not essential to entitle the insurer to rescind on the ground of misrepresentation [Section 45].

Marine insurance

Ordinary insurance

Who may commit May be committed by Committed either insured or insured. insurer

TEST OF MATERIALITY

The materiality of a representation is determined by the same rules as the materiality of a concealment [Section 46].

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(3) Affirmative warranty, which asserts the existence of a fact or condition at the time it is made; (4) Promissory warranty or executory warranty, which is one where the insured stipulates that certain facts or conditions pertaining to the risk shall exist or that certain things with reference thereto shall be done or omitted. It is in the nature of a condition subsequent [Sections 72 and 73].

Ordinary insurance Act involved

Passive form

Active form

Insured withholds information of material facts from the insurer; he maintains silence when he ought to speak

Insured makes erroneous statements of facts with the intent of inducing the insurer to enter into the insurance contract

MERCANTILE LAW

EFFECT

Materiality

MATERIAL WARRANTY General rule: Violation of a material warranty, or other material provision of the policy, on the part of either the insured or insurer, entitles the other to rescind [Section 74].

Determined by the same rules Effect Same effects on the part of the insured; insurer has right to rescind

Breach of a material warranty may either be: (1) Without fraud, in which case, the insurer will be exonerated from the time it occurs. If made during the inception, it will prevent the policy from taking effect [Section 76]. (2) With fraud, in which case, the policy is avoided ab initio.

Injured party is entitled to rescind a contract of insurance on ground of concealment or false representation, whether intentional or not.

BREACH OF WARRANTIES

 Warranty is a statement or promise by the insured set forth in the policy itself or incorporated in it by proper reference, the untruth or nonfulfillment of which in any respect and without reference to whether the insurer was in fact prejudiced by such untruth or non-fulfilment, renders the policy voidable by the insurer [Vance (1951)].  A warranty may also be made by the insurer.  A warranty may relate to the past, the present, the future, or to all of these [Section 68].  No particular form of words is necessary to create a warranty [Section 69].

Exceptions: (1) Loss occurs before the time of performance of the warranty [Section 73]; (2) The performance becomes unlawful [Section 73]; (3) The performance becomes impossible [Section 73]; (4) Waiver or estoppel. IMMATERIAL WARRANTY General rule: Breach of an immaterial provision does not avoid the policy [Section 75]. Exception: Breach of an immaterial provision avoids the policy when the parties stipulate that violation of a particular provision, though immaterial, shall avoid the policy. In effect, the parties converted the immaterial provision into a material one [Sundiang and Aquino (2013)].

KINDS OF WARRANTIES

(1) Express warranty, which is an agreement contained in the policy or clearly incorporated therein as part thereof; (2) Implied warranty, which is deemed included in the contract although not expressly mentioned (e.g., implied warranty of seaworthiness of the vessel in marine insurance and implied warranty not to alter the circumstances of the thing insured);

A condition in the policy which requires insured to disclose to the insurer of any insurance that, if violated by the insured, would ipso facto avoid the contract [Pioneer v. Yap (1974)]. Insurer is barred by waiver (or estoppel) to claim violation of the so-called hydrants warranty

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when, despite knowing fully that only 2 fire hydrants existed (out of the 11 hydrants required), it still issued the insurance policies and received the premiums [Qua Chee Gan v. Law Union (1955)]. Warranty

CAUSES OF LOSS (1) Remote cause is an event preceding another in a causal chain, but separated from it by other events; (2) Proximate cause is “that cause, which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred” [Vda. De Bataclan v. Medina (1957)]. (3) Immediate cause is the cause, not the proximate cause, which immediately precedes the loss.

Representation Nature

Part of the contract

Mere collateral inducement Form

Written on the policy, May be written in the actually or by reference policy or may be oral

LIABILITY FOR LOSS

Materiality Presumed material

Must be proved to be material

Compliance Must be complied with

strictly Requires only substantial truth and compliance

Applicability of incontestability clause Does not apply

MERCANTILE LAW

Applies

Claims Settlement and Subrogation CONCEPT OF LOSS

Loss in insurance law embraces injury or damage [Bonifacio Bros. v. Mora (1967)].

Loss for which the insurer is liable

Loss for which the insurer is liable

Loss the proximate cause of which is the peril insured against [Section 86]

Loss the proximate cause of which is the peril insured against [Section 86]

Loss the immediate cause of which is the peril insured against except where the proximate cause is an excepted peril

Loss the immediate cause of which is the peril insured against except where the proximate cause is an excepted peril

Loss through negligence of insured except where there was gross negligence amounting to willful acts

Loss through negligence of insured except where there was gross negligence amounting to willful acts

Loss caused by efforts to rescue the thing from peril insured against if, during the course of the rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession in whole or in part [Section 87]

Requisites: Recovery upon a loss requires that: (1) The insured must have insurable interest in the subject matter; (2) The interest is covered by the policy; (3) There be a loss; and (4) The loss must be one for which the insurer is liable; (5) Notice and proof of loss must be given if policy is fire insurance or when the same is stipulated in the policy.

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detecting any fraud that may have been practiced upon him, and to operate as a check upon extravagant claims.  Like a notice of loss, in the absence of any stipulation in the policy, proof may be given orally or in writing.  The insured is not bound to give such proof as would be necessary in a court of justice; but it is sufficient for him to give the best evidence which he has in his power at the time [Section 91].

NOTICE AND PROOF OF LOSS NOTICE OF LOSS

This refers to the formal notice given the insurer by the insured or claimant under a policy of the occurrence of the loss insured against. PURPOSE  Its purpose is to apprise the insurance company so that it may make proper investigation and take such action as may be necessary to protect its interest.  In fire insurance, an insurer is exonerated, if notice thereof be not given to him by an insured, or some person entitled to the benefit of the insurance, without unnecessary delay [Section 90].  In other types of insurance, failure to give notice will not exonerate the insurer, unless there is a stipulation in the policy requiring the insured to do so.  However, it has been held that formal notice of loss is not necessary if insurer has actual notice of loss.

RULES FOR RECOVERY General rule: Timely compliance with the notice and proof of loss is a condition precedent to the right to recover if the policy is fire insurance, or when the same is stipulated in the policy. Exceptions: (1) For both notice and proof of loss, waiver: (a) Defects in a notice or proof of loss may be waived when such defects, which the insured might remedy, are not specified, without unnecessary delay, to him as ground of objection by the insurer (Section 92); (b) Delay in presentation to an insurer of notice or proof of loss is waived if caused by any act of his, or if he omits to take objection promptly and specifically upon that ground; (2) For notice of loss, a formal notice of loss is not necessary if insurer has actual notice of loss.

FORM  In the absence of any stipulation in the policy, notice may be given orally or in writing.  The notice of loss may be in the form of an informal or provisional claim containing a minimum of information as distinguished from a formal claim which contains the full details of the loss, computations of the amounts claimed, and supporting evidence, together with a demand or request for payment [De Leon (2010)].

GUIDELINES SETTLEMENT

PROOF OF LOSS

ON

CLAIMS

 Claims settlement is the indemnification of the loss suffered by the insured. The claimant may be the insured or reinsured, the insurer who is entitled to subrogation, or a third party who has a claim against the insured  Where a policy gives the insurer the control of the decision to settle claim or litigate it, the insurer nevertheless is required to observe a certain measure of consideration for the interest of the insured.

It is the formal evidence given to the insurance company by the insured or claimant, under a policy, of: the occurrence of the loss, the particulars thereof, and the data necessary to enable the company to determine its liability and the amount. PURPOSE  Its purpose is to give the insurer information by which he may determine the extent of his liability but also; to afford him a means of

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Claims

Life insurance

MERCANTILE LAW

Non-life insurance

Maturity

Either: (1) Upon happening of event insured (1) Upon death of the person insured; against; and (2) Upon his surviving a specific period; (2) Event must occur within the period or specified in policy, otherwise insurer (3) Otherwise contingently on the has no liability continuance or cessation of life (Section 180)

Delivery of proceeds

General rule: The proceeds should be (1) Within 30 days after: delivered immediately upon maturity of (a) Proof of loss is received by insurer; policy. and (b) Ascertainment of loss or damage Exceptions: is made either by agreement (1) If payable in installments or as an between the insured and insurer or annuity, when such installments or by arbitration annuities become due; (2) If ascertainment is not made within (2) If maturity is upon death, within 60 60 days after such receipt by insurer days after presentation of claim and of proof of loss, then loss or damage filing of proof of death of insured. shall be paid within 90 days after such receipt.

Effect of refusal or (1) This entitles the beneficiary to collect interest on the proceeds of policy for the failure to pay claim duration of the delay at rate of twice the ceiling prescribed by the monetary within time prescribed board (unless refusal to pay is based on ground that claim is fraudulent) (2) In case damages are awarded, this includes attorney’s fees and other expenses incurred due to delay (plus the interest)  In case of litigation, it is the duty of the Commissioner or the Court to determine whether the claim has been unreasonably denied or withheld.  Failure to pay any such claim within the time prescribed shall be considered prima facie evidence of unreasonable delay in payment.

UNFAIR CLAIMS SANCTIONS

(1) Knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverage at issue; (2) Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies; (3) Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies; (4) Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear; or (5) Compelling policyholders to institute suits to recover amounts due under its policies by offering without justifiable reason substantially less than the amounts ultimately recovered in suits brought by them.

SETTLEMENT;

 No insurance company doing business in the Philippines shall refuse, without just cause, to pay or settle claims arising under coverages provided by its policies, nor shall any such company engage in unfair claim settlement practices.  Any of the following acts by an insurance company, if committed without just cause and performed with such frequency as to indicate a general business practice, shall constitute unfair claim settlement practices:

 Evidence as to numbers and types of valid and justifiable complaints to the Commissioner against an insurance company, and the Commissioner’s complaint experience with

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 Note: Subrogation applies only to property insurance and non-life insurance. RIGHTS TRANSFERRED  The rights to which the subrogee succeeds are the same as, but not greater than, those of the person for whom he is substituted.  The subrogee-insurer cannot acquire any claim, security, or remedy the subrogor did not have. In other words, a subrogee cannot succeed to a right not possessed by the subrogor. A subrogee can recover only if the insured likewise could have recovered [Sulpicio Lines, Inc. v. First Lepanto-Taisho Ins. Corp. (2005); Lorenzo Shipping Corp. v. Chubb and Sons, Inc. (2004)].  The insured can no longer recover from the offended party what was paid to him by the insurer but he can recover any deficiency if the damages suffered are more than what was paid. The deficiency is not covered by the right of subrogation.  The insurer must present the policy as evidence to determine the extent of its coverage [Wallen Phil. Shipping v. Prudential Guarantee (2003)].

other insurance companies writing similar lines of insurance shall be admissible in evidence in an administrative or judicial proceeding for the purpose of determining whether unfair claim settlement practices have been committed.  If it is found, after notice and an opportunity to be heard, that an insurance company has violated this section, each instance of noncompliance may be treated as a separate violation and shall be considered sufficient cause for the suspension or revocation of the company’s certificate of authority [Section 247].

PRESCRIPTION OF ACTION

 In the absence of an express stipulation in the policy, it being based on a written contract, the action prescribes in ten years [Article 1144, Civil Code].  However, the parties may validly agree on a shorter period provided it is not less than one year from the time the cause of action accrues [Section 63].  In motor vehicle insurance, action prescribes in one year.  The cause of action accrues from the rejection of the claim of the insured and not from the time of loss. A stipulation stating that the prescriptive period for filing an action is one year from the happening of loss is void. In such cases, since the stipulation is void and it is upon a written contract, the time limit is ten years from the time the cause of action accrues.  Prescription is essential for the prompt settlement of claims as it demands for suits to be brought while the evidence as to the origin and cause of the loss or destruction has not yet disappeared.

WHEN THERE IS NO RIGHT OF SUBROGATION (1) Where the insured by his own act releases the wrongdoer or third party liable for the loss or damage; (2) Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith settled the insured’s claim for loss; (3) Where the insurer pays the insured for a loss or risk not covered by the policy [Pan Malayan Ins. Co. v. CA (1997)]; (4) In life insurance; (5) For recovery of loss in excess of insurance coverage [De Leon (2010)]. Since the insurer can be subrogated to only such rights as the insured may have, should the insured, after receiving payment from the insurer, release the wrongdoer who caused the loss, the insurer loses his rights against the latter. But in such a case, the insurer will be entitled to recover from the insured whatever it has paid to the latter, unless the release was made with the consent of the insurer [Manila Mahogany v. CA (1987)].

SUBROGATION

 Subrogation is a process of legal substitution. The insurer, after paying the amount covered by the insurance policy, steps into the shoes of the insured and avails himself of the latter's rights that exist against the wrongdoer at the time of loss.  The insurer becomes entitled to recover from the wrongdoer the amount of the loss it may have paid to the insured.

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Insurance Commissioner

MERCANTILE LAW

Commission may be revoked or suspended by the Insurance Commissioner for any of the following grounds [Section 254]:

JURISDICTION AND ADJUDICATORY POWERS

(1) The company is in an unsound condition; (2) That it has failed to comply with the provisions of law or regulations obligatory upon it; (3) That its condition or method of business is such as to render its proceedings hazardous to the public or its policyholders; (4) That its paid-up capital stock, in the case of a domestic stock corporation, or its available cash assets, in the case of a domestic mutual company, or its security deposits, in the case of a foreign company, is impaired or deficient; (5) That the margin of solvency required of such company is deficient.  The Commissioner is authorized to suspend or revoke all certificates of authority granted to such insurance company, its officers and agents, and no new business shall thereafter be done by such company or for such company by its agents in the Philippines while such suspension, revocation, or disability continues or until its authority to do business is restored by the Commissioner.  Before restoring such authority, the Commissioner shall require the company concerned to submit to him a business plan showing the company’s estimated receipts and disbursements, as well as the basis therefor, for the next succeeding three years.

The Insurance Commissioner has the power to adjudicate disputes relating to an insurance company’s liability to an insured under a policy. A complaint or claim filed with such official is considered an “action” or “suit” the filing of which would have the effect of tolling the suspending the running of the prescriptive period. (1) Concurrent jurisdiction (with regular civil courts) over cases where any single claim does not exceed P5,000,000 involving liability arising from: (a) Insurance contract; (b) Contract of suretyship; (c) Reinsurance contract; (d) Membership certificate issued by members of mutual benefit association [Section 439]; (2) Primary and exclusive jurisdiction over claims for benefits involving pre-need plans where the amount of benefits does not exceed P100,000 [Sec. 55, Pre-Need Code].  For the purpose of proceeding under its adjudicatory powers under the Insurance Code, the Commissioner or any officer thereof designated by him, is empowered to administer oaths and affirmation, subpoena witnesses, compel their attendance, take evidence and require the production of any books, papers, documents or contracts or other records which are relevant or material to the inquiry [Section 439]. Note: However, the Insurance Commission has no jurisdiction to decide the legality of a contract of agency entered into between an insurance company and its agent. The same is not covered by the term “doing or transacting insurance business” under Section 2, neither is it covered by Section 439, which grants the Commissioner adjudicatory powers [Sundiang and Aquino (2013)].

LIQUIDATION OF INSURANCE COMPANY

 If the company is determined by the Commissioner to be insolvent or cannot resume business, he shall, if public interest requires, order its liquidation [Section 256].  This should be distinguished from a situation where a conservator is appointed when the Commissioner finds that a company is in a state of continuing inability or unwillingness to maintain a condition of solvency or liquidity adequate to protect the policyholders and creditors. The conservator will take charge of the management of the insurance company [Section 255].

REVOCATION OF CERTIFICATE OF AUTHORITY

The Certificate of Authority issued to the domestic or foreign company by the

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Common Carriers

MERCANTILE LAW

clientele does not exclude it from the definition of a common carrier [First Phil. Industrial v. CA (1998)].  The true test for a common carrier is not the quantity or extent of the business actually transacted, or the number and character of the conveyances used in the activity, but whether the undertaking is a part of the activity engaged in by the carrier that he has held out to the general public as his business or occupation. If the undertaking is a single transaction, not a part of the general business or occupation engaged in, as advertised and held out to the general public, the individual or the entity rendering such service is a private, not a common, carrier. The question must be determined by the character of the business actually carried on by the carrier, not by any secret intention or mental reservation it may entertain or assert when charged with the duties and obligations that the law imposes [Teodoro v. Nicolas (2012)].  A common carrier need not have fixed and publicly known routes. Neither does it have to maintain terminals or issue tickets [Asia Lighterage and Shipping v. CA (2003)].

CONCEPT

Common carriers are: (1) Persons, corporations, firms or associations; (2)Engaged in the business of carrying or transporting; (3) Passengers or goods or both; (4) By land, water, or air; (5) For compensation; (6) Offering their services to the public [Article 1732]. Carriers are persons or corporations who undertake to transport or convey goods, property or persons, from one place to another, gratuitously or for hire, and are classified as: (1) Private or special carriers, who transport or undertake to transport in a particular instance for hire or reward [Agbayani, Commercial Laws of the Philippines (1987)]; and (2) Common or public carriers, defined in Article 1732. Article 1732 makes no distinction: (1) Between one whose principal business activity is the carrying of persons or goods or both, and one who does such carrying only as an ancillary activity [Fabre v. CA (1996)]; (2) Between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such service on an occasional, episodic, or unscheduled basis [Loadstar Shipping Co., Inc. v. CA (1999)]; (3) Between a carrier offering its services to the general public and who offers services or solicits business only from a narrow segment of the general population [De Guzman v. CA (1988)].

Common carrier

Private carrier

Availability Holds himself out in common, that is, to all persons who choose to employ him, as ready to carry for hire

Agrees in some special case with some private individual to carry for hire

Binding effect Bound to carry all who offer and tender reasonable compensation for carrying them

 One engaged in the business of transporting petroleum products from refineries via pipeline is a common carrier. It is engaged in the business of transporting or carrying goods, i.e., petroleum products, for hire as a public employment. It undertakes to carry for all persons indifferently, that is, to all persons who choose to employ its services, and transports the goods by land and for compensation. The fact that it has a limited

Not bound to carry for any reason, such goods as it is accustomed to carry, unless it enters into a special agreement to do so

Diligence required Extraordinary diligence

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Common carrier

a vehicle owned by another and operated under his license. If a registered owner is allowed to escape liability by proving who the supposed owner of the vehicle is, it would be easy for him to transfer the subject vehicle to another who possesses no property with which to respond financially for the damage done [Dizon v. Octavio (1955)].

Private carrier

Governing law Civil Code; Code of Law on obligations Commerce and special and contracts laws, if not regulated by the Civil Code (Article 1766); law of the country to which the goods are to be transported, if regarding liability for loss, destruction, or deterioration of goods

DILIGENCE REQUIRED STANDARD OF DILIGENCE

Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence, according to all the circumstances of each case:  In the vigilance over the goods; and  For the safety of the passengers transported by them [Article 1733].

Regulation A public service, Not subject therefore subject to regulation as regulation common carrier

MERCANTILE LAW

to a

Extraordinary diligence in the vigilance over the goods is expressed in Articles 1734, 1735, and 1745, Nos. 5, 6, and 7, while the extraordinary diligence for the safety of the passengers is further set forth in Articles 1755 and 1756.

 It is not necessary that the carrier be issued a certificate of public convenience [Loadstar Shipping Co., Inc. v. CA (1999)].  With respect to the issuance of a certificate of public convenience, the issue of kabit system arises. It is an arrangement whereby a person who has been granted a certificate of convenience allows another person who owns motor vehicles to operate under such franchise for a fee (Lita Enterprises, Inc. v. IAC (1984)].  The kabit system is invariably recognized as being contrary to public policy and therefore void and inexistent under Article 1409. Thus, for the safety of passengers and the public, the registered owner of the vehicle is not allowed to prove that another person has become the owner so that he may be thereby relieved of responsibility [Lim v. CA (2002)].

Ratio: As stated in Article 1733, extraordinary diligence is required because of the nature of the business of common carriers and for reasons of public policy. EXTRAORDINARY DILIGENCE  Requires rendering service with the greatest skill and utmost foresight [Agbayani (1987)];  Requires carrying passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances [Article 1755];  Does not require common carriers to exercise all the care, skill, and diligence of which the human mind can conceive, nor such as will free the transportation of passengers from all possible perils.

Ratio: One of the primary factors considered in the granting of a certificate of public convenience for the business of public transportation is the financial capacity of the holder of the license, so that liabilities arising from accidents may be duly compensated. The kabit system renders illusory such purpose and, worse, may still be availed of by the grantee to escape civil liability caused by a negligent use of

Note: A common carrier is not an insurer of the safety of its passengers and is not bound absolutely and at all events to carry them safely and without injury [Yobido v. CA (1997)].

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 Moreover, if the goods are lost, destroyed, or deteriorated, common carriers are presumed to have been at fault or to have acted negligently [Article 1735].

PRESUMPTION OF NEGLIGENCE

 The mere proof of delivery of goods in good order to a carrier, and of their arrival at the place of destination in bad order, makes out a prima facie case against the carrier, so that if no explanation is given as to how the injury occurred, the carrier must be held responsible. It is incumbent upon the carrier to prove that the loss was due to accident or some other circumstance inconsistent with its liability [Ynchausti Steamship v. Dexter and Unson (1920)].  In case of death of or injuries to passengers, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as prescribed in Arts 1733 and 1755 [Article 1756].

EXEMPTING CAUSES Common carriers are not responsible for the loss, destruction, or deterioration of the goods if the same is due to any of the following causes only:  Flood, storm, earthquake, lightning, or other natural disaster or calamity;  Act of the public enemy in war, whether international or civil;  Act of omission of the shipper or owner of the goods;  The character of the goods or defects in the packing or in the containers;  Order or act of competent public authority [Article 1734].

LIABILITIES

 The obligation of the common carrier consists in the transportation of passengers or goods or both [Article 1732].  The liabilities of a common carrier arises from a contract of carriage. Thus, the cause of action, when there is failure on its part to exert extraordinary diligence according to all circumstances, is for breach of contract [Isaac v. A.L. Ammen (1957)].  In what follows, these liabilities in case of breach, both with respect to vigilance over the goods and safety of the passengers transported, will be discussed.

In all other cases of loss, destruction, or deterioration, the common carrier is presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence [Article 1735]. The analysis, therefore, is two-pronged:  Whether or not the cause of the loss, destruction, or deterioration is included under Article 1734;  If not, whether or not the common carrier exercised extraordinary diligence. Thus, in De Guzman v. CA (1988), it was held that hijacking, not being included in Article 1734, must be dealt with under the provisions of Article 1735, and thus, the common carrier is presumed to have been at fault or negligent.

Vigilance Over Goods LIABILITY, IN GENERAL

 The law of the country to which the goods are to be transported shall govern the liability of the common carrier for their loss, destruction or deterioration [Article 1753].  Under Philippine law, the liability of the common carrier with respect to vigilance over goods, in general, are as follows:  Common carriers are responsible for the loss, destruction, or deterioration of the goods [Article 1734]. In fact, they are liable even in those cases where the cause of the loss or damage is unknown [Agbayani (1987)].

NATURAL DISASTER OR CALAMITY Requisites:  The natural disaster must have been the proximate and only cause of the loss;  The common carrier must exercise due diligence to prevent or minimize the loss before, during and after the occurrence of the flood, storm or natural disaster [Article 1739];  The common carrier must not have negligently incurred delay [Article 1740];

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negligence of the common carrier, the latter shall be liable for the damages, which shall, however, be equitably reduced [Article 1741].

 In order that a common carrier may be absolved from liability where the loss, destruction or deterioration of the goods is due to a natural disaster or calamity, it must be shown that the such natural disaster or calamity was the proximate and only cause of the loss; there must be an entire exclusion of human agency from the cause of the injury of the loss [Philippine American General Insurance Co., Inc. v. MGG Marine Services, Inc. (2002)].  Moreover, even in cases where a natural disaster is the proximate and only cause of the loss, a common carrier is still required to exercise due diligence to prevent or minimize loss before, during and after the occurrence of the natural disaster, for it to be exempt from liability under the law for the loss of the goods [Article 1739].  Fire may not be considered a natural disaster or calamity. This must be so as it arises almost invariably from some act of man or by human means. It does not fall within the category of an act of God unless caused by lightning or by other natural disaster or calamity. It may even be caused by the actual fault or privity of the carrier [Eastern Shipping Lines v. IAC (1987)].

CHARACTER OF THE GOODS

Requisites:  The loss, destruction, or deterioration of the goods is due to the character of the goods or defects in the packing or in the containers [Article 1739];  The common carrier must exercise due diligence to forestall or lessen the loss [Article 1741]. If the fact of improper packing is known to the carrier or its servants or apparent upon ordinary observation, but it accepts the goods notwithstanding such condition, it is not relieved of liability for loss or injury resulting therefrom [Southern Lines v. CA (1962)].

ORDER OF COMPETENT AUTHORITY

Requisites:  There must be an order or act of competent public authority through which the goods are seized or destroyed [Article 1734];  The said public authority must have had the power to issue the order [Article 1743]. The intervention of the municipal officials was not of a character that would render impossible the fulfillment by the carrier of the obligation. A carrier is not duty bound to obey an illegal order (of a mayor) to dump into the sea the scrap iron. There is absence of sufficient proof that the issuance of the order was attended with such force or intimidation as to completely overpower the will of the carrier’s employees [Ganzon v. CA (1988)].

ACT OF PUBLIC ENEMY

Requisites:  The act of the public enemy was committed either in an international or civil war [Art. 1734];  The act of the public enemy must have been the proximate and only cause;  The common carrier must exercise due diligence to prevent or minimize the loss before, during and after the act of the public enemy causing the loss, destruction or deterioration of the goods [Article 1739].

FORCE MAJEURE

Force majeure, in general, has also been invoked as an exempting cause based on Article 1174, which states that no person shall be responsible for a fortuitous event which could not be foreseen, or which, though foreseen, was inevitable.

ACT OR OMISSION OF SHIPPER OR OWNER

 The act or omission of the shipper must have been the proximate and only cause of the loss, destruction, or deterioration of the goods.  If the shipper or owner merely contributed to the loss, destruction or deterioration of the goods, the proximate cause being the

A fortuitous event has the following characteristics:  The cause of the unforeseen and unexpected occurrence, or the failure of the debtor to

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    





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 However, the responsibility to exercise extraordinary diligence begins from the time the goods are unconditionally placed in the possession of and received by the carrier for transportation [Article 1736].

comply with his obligations, must be independent of human will; It must be impossible to foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to avoid; The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and The obligor must be free from any participation in the aggravation of the injury resulting to the creditor. There must be an entire exclusion of human agency from the cause of injury or loss. Moreover, a common carrier may not be absolved from liability in case of force majeure or fortuitous event alone. The common carrier must still prove that it was not negligent in causing the death or injury resulting from an accident [Yobido v. CA (1997)]. Loss of a ship and of its cargo, in a wreck due to accident or force majeure must, as a general rule, fall upon their respective owners, except in cases where the wrecking or stranding of the vessel occurred through the malice, carelessness, or lack of skill on the part of the captain or because the vessel put to sea is insufficiently repaired and prepared. In order that the exemption due to force majeure would apply, the carrier must prove that the loss or destruction of the merchandise was due to accident and force majeure and not to fraud, fault, or negligence on the part of the captain or owner of the ship [Tan Chiong Sian v. Inchausti (1912)].

The carrier’s responsibility terminates in any of the following cases:  When the goods are delivered actually or constructively by the carrier to the consignee or to the person who has a right to receive them [Article 1736];  When the goods are temporarily unloaded or stored in transit by reason of the exercise of the shipper or owner of his right of stoppage in transit;  When the consignee has been advised of the arrival of the goods at the place of destination and has had reasonable opportunity to remove them or dispose of them from the warehouse of the carrier at the place of destination [Article 1738].

DELIVERY OF GOODS TO COMMON CARRIERS

 Under Article 1736, delivery means unconditionally placing the goods in the possession of the carrier and the carrier receiving them for transportation.  Thus, if the common carrier received the goods not for transportation but only for safekeeping, then the duty of extraordinary diligence has not yet started.  Unconditionally placing the goods in the possession of the carrier means the shipper cannot get them back from the common carrier at will.  The liability of the carrier as common carrier begins with the actual delivery of the goods for transportation and not merely with the formal execution of a receipt or bill of lading; the issuance of a bill of lading is not necessary to complete delivery and acceptance. Even where it is provided by statute that liability commences with the issuance of the bill of lading actual delivery and acceptance are sufficient to bind the carrier [Cia. Maritima v. Ins. Co. of North America (1964)].

CONTRIBUTORY NEGLIGENCE

 The liability of the common carrier shall be equitably reduced when the loss, destruction, or deterioration of the goods when:  The negligence of the common carrier was the proximate cause thereof; and  The shipper or owner merely contributed to such loss, destruction, or deterioration [Article 1741].

DURATION OF LIABILITY

 A contract of transportation is consensual in nature; therefore it is perfected upon the meeting of the minds of the parties [Article 1305].

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Exception: The duty to observe such diligence ceases when shipper or owner made use of the right of stoppage in transitu.

ACTUAL OR CONSTRUCTIVE DELIVERY

The extraordinary responsibility of the common carrier ends when, subject to Article 1738, the goods are delivered actually or constructively by the carrier to:  The consignee; or  The person who has a right to receive them [Article 1736], such as agents, brokers, and the like.

Stoppage in transitu is the act by which the unpaid vendor of goods stops their progress and resumes possession of them constructively while they are in the course of transit from him to the purchaser, and not yet actually delivered to the latter [Agbayani (1987)]. Basis: Under Article 1530, when the buyer of the goods becomes insolvent, the unpaid seller who has parted with the possession of the goods at any time while they are in transit, may resume the possession of the goods as he would have had if he had never parted with the possession.

Article 1738 provides that the extraordinary liability of the common carrier continues to be operative even during the time the goods are stored in a warehouse of the carrier at the place of destination, until the consignee has:  Been advised of the arrival of the goods; and  Had reasonable opportunity thereafter to remove them or otherwise dispose of them.

When the right of stoppage in transitu is exercised, the common carrier holds the goods in the capacity of an ordinary bailee or warehouseman upon the theory that the exercise of the right of stoppage in transitu terminates the contract of carriage. Hence, only ordinary diligence is required [Agbayani (1987)].

Delivery of the cargo to the customs authorities is not delivery to the consignee or “to the person who has a right to receive them” as contemplated in Article 1736 because in such case the goods are still in the hands of the government and the owner cannot exercise dominion over them. However, the parties may agree to limit the liability of the carrier considering that the goods still have to go through the inspection of the customs authorities before they are actually turned over to the consignee. This is a situation where it may be said that the carrier loses control of the goods because of a custom regulation and it is unfair that it be made responsible for what may happen during the interregnum [Lu Do v. Binamira (1957)].

TEMPORARY STORAGE

UNLOADING

MERCANTILE LAW

STIPULATION FOR LIMITATION OF LIABILITY

There are two possible stipulations limiting the liability of the common carrier:  Stipulation limiting the common carrier’s liability as to the diligence required; and  Stipulation limiting the common carrier’s liability as to the amount of liability.

AS TO DILIGENCE REQUIRED

A stipulation between the common carrier and the shipper or owner limiting the liability of the former for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence shall be valid, provided it be:  In writing, signed by the shipper or owner;  Supported by a valuable consideration other than the service rendered by the common carrier; and  Reasonable, just and not contrary to public policy [Article 1744].

OR

The common carrier’s duty to observe extraordinary diligence over the goods remains in full force and effect even when they are temporarily unloaded or stored in transit, unless the shipper or owner has made use of the right of stoppage in transitu [Article 1737]. General rule: Extraordinary diligence over the goods remains even when the goods are temporarily unloaded or stored in transit.

An agreement limiting the common carrier’s liability for delay on account of strikes or riots is also valid [Article 1748].

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cannot be availed of in case of the loss, destruction, or deterioration of the goods [Article 1747]. The limitation may be availed of if the delay or change of route was due to a just cause.  The fact that the common carrier has no competitor along the line or route, or a part thereof, to which the contract refers shall be taken into consideration on the question of whether or not a stipulation limiting the common carrier’s liability is reasonable, just and in consonance with public policy [Article 1751].  Even when there is an agreement limiting the liability of the common carrier in the vigilance over the goods, the common carrier is disputably presumed to have been negligent in case of their loss, destruction or deterioration [Article 1752].

AS TO AMOUNT OF LIABILITY A stipulation that the common carrier’s liability is limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding [Article 1749]. A contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction or deterioration of the goods is valid if:  It is reasonable and just under the circumstances; and  It has been fairly and freely agreed upon [Article 1750]. The fact that the conditions are printed at the back of the ticket stub in letters so small that they are hard to read would not warrant the presumption that the [shipper] was aware of those conditions such that he had “fairly and freely agreed” to those conditions [Shewaram v. PAL (1966)].

VOID STIPULATIONS

Any of the following or similar stipulations shall be considered unreasonable, unjust and contrary to public policy:  That the goods are transported at the risk of the owner or shipper;  That the common carrier will not be liable for any loss, destruction, or deterioration of the goods;  That the common carrier need not observe any diligence in the custody of the goods;  That the common carrier shall exercise a degree of diligence less than that of a good father of a family, or of a man of ordinary prudence in the vigilance over the movables transported;  That the common carrier shall not be responsible for the acts or omission of his or its employees;  That the common carrier’s liability for acts committed by thieves, or of robbers who do not act with grave or irresistible threat, violence or force, is dispensed with or diminished;  That the common carrier is not responsible for the loss, destruction, or deterioration of goods on account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the contract of carriage [Article 1745].

While a passenger may not have signed the plane ticket, he is nevertheless bound by the provision thereof; such provisions have been held to be part of the contract of carriage and valid and binding upon the passenger regardless of the latter’s lack of knowledge or assent to the regulation. It is what is known as a contract of adhesion wherein one party imposes a ready-made form of contract on the other. The one who adheres to the contract is in reality free to reject it entirely. A contract limiting liability upon an agreed valuation does not offend against the policy of the law forbidding one from contracting against his own negligence [Ong Yiu v. CA (1979)].

EFFECT OF STIPULATIONS

The effect of these stipulations is subject to the following provisions:  An agreement limiting the common carrier’s liability may be annulled by the shipper or owner if the common carrier refused to carry the goods unless the former agreed to such stipulation [Article 1746].  If the common carrier, without just cause, delays the transportation of the goods or changes the stipulated or usual route, the contract limiting the common carrier’s liability

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The following stipulations are also void:  Stipulation exempting the common carrier from any and all liability for loss or damage occasioned by its own negligence;  Stipulation providing for an unqualified limitation of such liability to an agreed stipulation [Heacock v. Macondray (1921)].

BAGGAGE IN PASSENGERS

MERCANTILE LAW

POSSESSION

OF

As to baggage other than checked-in baggage, they are governed by Articles 1998, and 20002003, concerning the responsibility of hotelkeepers [Article 1754]. Article 1998, as applied by analogy, the baggage of passengers in their personal custody or in that of their employees, while being transported, are regarded as necessary deposits. The common carriers are responsible as depositaries, provided that:  Notice was given to them, or to their employees, of the effects brought by the passengers; and  The passengers take the precautions which the common carrier advised relative to the care and vigilance of their baggage.

LIABILITY FOR BAGGAGE OF PASSENGERS Baggage are things that a passenger will bring with him consistent with a temporary absence from where he lives. Passenger’s baggage must have a direct relationship with the passenger who is traveling. For instance, a balikbayan box or suitcase is passenger’s baggage. However, 10,000 cans of corned beef is not considered as passenger baggage. They are considered as goods. They are not part of the contract of carriage [of passenger]. A separate contract of carriage [or bill of lading] must be entered into in order to transport them. These goods will then be transported whether or not a person is physically traveling with them [Agbayani (1987)].

In case of loss or injury to the baggage of passengers in their personal custody, or in that of their employees, while being transported, the carrier is liable if the loss or injury is caused by:  His servants;  His employees;  Strangers [Article 2000]; or  A thief or robber done without the use of arms or irresistible force [Article 2001].

There are two kinds of passenger’s baggage, which are governed differently:  Passenger baggage in the custody of the passenger [or carry-on luggage]; and  Passenger baggage not in the custody of the passenger [or checked-in luggage].

The carrier is not liable if loss or injury is caused by:  Force majeure [Article 2000];  Theft or robbery with the use of arms or irresistible force [Article 2001];  The acts of the passenger, his family, servants, or visitors;  The character of the baggage [Article 2002].

The liability is greater for baggage that is in the custody of the carrier, or checked-in baggage, as compared to those in the possession of the passenger.

CHECKED-IN BAGGAGE

The following provisions also figure out in determining the liability of the common carrier:  The fact that passengers are constrained to rely on the vigilance of the common carrier shall be considered in determining the degree of care required of him [Article 2000].  The common carrier cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the passenger.

 The provisions of Articles 1733-1753 shall apply to passenger’s baggage which is not in his personal custody or in that of his employee [Article 1754].  In other words, the rules governing the responsibility of a common carrier in the transportation of goods just discussed apply. Thus, extraordinary diligence is required.

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 Any stipulation whereby the responsibility of the common carrier as set forth in Articles 1998-2001 is suppressed or diminished shall be void [Article 2003].

Based on jurisprudence, the duty that the carrier of passengers owes to its patrons extends to persons boarding the cars as well as those alighting therefrom [Del Prado v. Manila Railroad (1929)].

Safety Of Passengers

This is also reflected in Article 17, Warsaw Convention, which applies to international air carriage. It provides that the liability of a common carrier for injury to the passenger lasts from embarkation to disembarkation, including the period when the passenger is on board the aircraft.

LIABILITY, IN GENERAL Under Philippine law, the liability of the common carrier with respect to the safety of passengers, in general, are as follows:  A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances [Article 1755].  In case of death of or injuries to passengers, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence [Article 1756].

In maritime commerce, Article 698, Code of Commerce relates to the period of the voyage: In case a voyage already begun should be interrupted:  The passengers shall be obliged to pay the fare in proportion to the distance covered; and  If the interruption is due to a fortuitous event, without right to recover for losses and damages; if caused by the captain exclusively, with a right to indemnity.

VOID STIPULATIONS

If the interruption should be caused by the disability of the vessel, and a passenger should agree to await the repairs:  He may not be required to pay any increased price of passage; but  His living expenses during the stay shall be for his own account.

General rule: The responsibility of a common carrier for the safety of passengers cannot be dispensed with or lessened by stipulation by the posting of notices, by statements on tickets, or otherwise [Article 1757]. Exception: When a passenger is carried gratuitously, a stipulation limiting the common carrier’s liability for negligence is valid.

In case of delay in the departure of the vessel, the passengers have:  The right to remain on board;  If the delay is not due to a fortuitous event or force majeure, with the right to be furnished with food for the account of the vessel.

Exception to the exception: Even when a passenger is carried gratuitously, a stipulation limiting the common carrier’s liability for willful acts or gross negligence is invalid.

If the delay should exceed ten days:  Passengers requesting the same shall be entitled to the return of the fare; and  If it is due exclusively to the fault of the captain or ship agent, they may also demand indemnity for losses and damages.

The reduction of fare does not justify any limitation of the common carrier’s liability [Article 1758].

DURATION OF LIABILITY

As in the contract of carriage for goods, the perfection of the contract of carriage of passengers does not necessarily coincide with the commencement of the duty of extraordinary diligence. It may occur at the same time or later.

A vessel exclusively devoted to the transportation of passengers must take them directly to the port or ports of destination, no

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matter what the number of passengers may be, making all the stops indicated in its itinerary.

WAITING FOR CARRIER BOARDING OF CARRIER

MERCANTILE LAW

without intent of engaging in the difficulty, returns to relieve his brother, is deemed reasonably and necessarily delayed and thus continues to be a passenger entitled as such to the protection of the railroad and company and its agents [La Mallorca v. CA (1966)].  The reasonableness of time should be made to depend on the attending circumstances of the case, such as the kind of common carrier, the nature of its business, the customs of the place, and so forth, and therefore precludes a consideration of the time element per se without taking into account such other factors. The primary factor to be considered is the existence of a reasonable cause as will justify the presence of the victim on or near the petitioner’s vessel.  In the case of a shipper, the passengers of vessels are allotted a longer period of time to disembark from the ship than other common carriers such as a passenger bus, since such vessels are capable of accommodating a bigger volume of both passenger and baggage as compared to the capacity of a regular commuter bus. Consequently, a ship passenger will need at least an hour as is the usual practice, to disembark from the vessel and claim his baggage whereas a bus passenger can easily get off the bus and retrieve his luggage in a very short period of time [Aboitiz Shipping v. CA (1989)].  The relation of carrier and passenger continues until the latter has been landed at the port of destination and has left the carrier’s premises. Hence, the carrier necessarily would still have to exercise extraordinary diligence in safeguarding the comfort, convenience and safety of its stranded passengers until they have reached their final destination [PAL v. CA (1993)].

OR

 As to the commencement of the duty of the common carrier, in Del Prado v. Manila Railroad (1929), it was held that the duty extends to persons boarding the cars as well as those alighting therefrom.  Thus, it is the duty of common carriers of passengers to stop their conveyances at a reasonable length of time in order to afford passengers an opportunity to board and enter, and they are liable for injuries suffered by boarding passengers resulting from the sudden starting up or jerking of their conveyances while they are doing so [Dangwa Transportation v. CA (1991)].  In this connection, however, a person boarding a moving car must be taken to assume the risk of injury from boarding the car under the conditions open to his view, but he cannot fairly be held to assume the risk that the motorman, having the situation in view, will increase the peril by accelerating the speed of the car before he is planted safely on the platform [Del Prado v. Manila Railroad (1929)].

ARRIVAL AT DESTINATION

As to the termination of the duty of the common carrier, it has been held that the relation of carrier and passenger does not cease at the moment the passenger alights from the carrier’s vehicle at a place selected by the carrier at the point of destination, but continues until the passenger has had a reasonable time or a reasonable opportunity to leave the carrier’s premises. What is a reasonable time or a reasonable delay within this rule is to be determined from all the circumstances:  A person who, after alighting from a train, walks along the station platform is considered still a passenger;  A passenger, who has alighted at his destination and is proceeding by the usual way to leave the company’s premises, but before actually doing so is halted by the report that his brother, a fellow passenger, has been shot, and he in good faith and

LIABILITY OTHERS EMPLOYEES

FOR

ACTS

OF

 Common carriers are liable for the death of or injuries to passengers through the negligence or willful acts of the former’s employees, although such employees may have acted

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beyond the scope of their authority or in violation of the orders of the common carriers.  This liability does not cease even upon proof that they exercised all the diligence of a good father of a family in the selection and supervision of their employees [Article 1759].  Also, this liability cannot be eliminated or limited by stipulation, by the posting of notices, by statements on the tickets or otherwise [Article 1760].

Note: The law speaks of injuries suffered by the passenger but not death. However, there appears to be no reason why the common carrier should not be held liable under such circumstances. The word “injuries” should be interpreted to include death [Agbayani (1987)]. Under Article 1763, a tort committed by a stranger which causes injury to a passenger does not accord the latter a cause of action against the carrier. The negligence for which a common carrier is held responsible is the negligent omission by the carrier’s employees to prevent the tort from being committed when the same could have been foreseen and prevented by them. Further, when the violation of the contract is due to the willful acts of strangers, as in the instant case, the degree of care essential to be exercised by the common carrier for the protection of its passenger is only that of a good father of a family [Pilapil v. CA (1989)].

Ratio: The servant is clothed with delegated authority and charged with the duty to execute the carrier’s undertaking to carry the passenger safely [Agbayani (1987)]. Also, the defense of diligence in the selection and supervision of employees does not obtain because the liability is not based on quasi-delict, but on culpa contractual. However, there must be a reasonable connection between the act and the contract of carriage. Note: The employee must be on duty at the time of the act.

MANUFACTURERS OF EQUIPMENT

 It is enough that the assault happens within the course of the employee’s duty. It is no defense for the carrier that the act was done in excess of authority or in disobedience of the carrier’s orders. The carrier’s liability here is absolute in the sense that it practically secures the passengers from assaults committed by its own employees.  Accordingly, it is the carrier’s strict obligation to select its drivers and similar employees with due regard not only to their technical competence and physical ability, but also, no less important, to their total personality, including their patterns of behavior, moral fibers, and social attitude [Maranan v. Perez (1967)].

OTHER PASSENGERS STRANGERS

MERCANTILE LAW

While the carrier is not an insurer of the safety of the passengers, it should nevertheless be held answerable for the flaws of its equipment, if such flaws were discoverable. The rationale for the common carrier’s liability for manufacturing defects is the fact that the passenger has neither choice nor control over the carrier in the selection and use of the equipment and appliances in use by the carrier. Having no privity whatever with the manufacturer or vendor of the defective equipment, the passenger has no remedy against him [Necesito v. Paras (1958)].

CONTRIBUTORY NEGLIGENCE

 The passenger must observe the diligence of a good father of a family to avoid injury to himself [Article 1762].  The contributory negligence of the passenger does not bar recovery of damages for his death or injuries, if the proximate cause thereof is the negligence of the common carrier, but the amount of damages shall be equitably reduced [Article 1762].  It is negligence per se for a passenger on a railroad to voluntarily or inadvertently

AND

A common carrier is responsible for injuries suffered by a passenger on account of the willful acts or negligence of other passengers or of strangers, if the common carrier’s employees through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission [Article 1763].

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 The natural and probable consequence of the breach of the obligation; and  Those which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted;  In case of fraud, bad faith, malice or wanton attitude, all damages which may be reasonably attributed to the non-performance of the obligation. In the absence of a showing that common carrier’s attention was called to the special circumstances requiring prompt delivery of a passenger’s luggage, the common carrier cannot be held liable for the cancellation of passenger’s contracts [for exhibition of films] as it could not have foreseen such an eventuality when it accepted the luggage for transit [PanAm World Airways v. IAC (1988)].

protrude his arm, hand, elbow, or any other part of his body through the window of a moving car beyond the outer edge of the window or outer surface of the car, so as to come in contact with objects or obstacles near the track; no recovery can be had for an injury which but for such negligence would not have been sustained [Isaac v. A. L. Ammen Transportation (1975)]. In this case, the negligence of the passenger was not contributory, but was the proximate cause of the injury.

EXTENT OF DAMAGES

LIABILITY

FOR

Damages recoverable from common carriers, both in cases of carriage of passengers and goods, shall be awarded in accordance with Title XVIII concerning Damages.

MORAL DAMAGES

Moral damages, though incapable of pecuniary computation, if they are the proximate result of the common carrier’s wrongful act or omission, may be recovered [Article 2217].

Article 2206, on liability, in case of death, for loss of earning capacity, support, and moral damages for mental anguish, shall also apply to the death of a passenger caused by the breach of contract by a common carrier [Article 1764].

In cases of breach of contract of carriage, moral damages may be recovered where:  The common carrier acted fraudulently;  The common carrier acted in bad faith [Article 2220];  Death of a passenger resulted [Article 2206].

Thus, the damages recoverable are:  Actual or compensatory damages;  Moral damages;  Exemplary damages;  Nominal, temperate, and liquidated damages;  Attorney’s fees.

ACTUAL OR DAMAGES

MERCANTILE LAW

Bad faith contemplates a state of mind affirmatively operating with furtive design or with some motive of self-interest or will or for ulterior purpose [Air France v. Carrascoso (1966)].

COMPENSATORY

Actual or compensatory damages refer to adequate compensation for such pecuniary loss suffered as duly proved [Article 2199].

When it comes to contracts of common carriage, inattention and lack of care on the part of the carrier resulting in the failure of the passenger to be accommodated in the class contracted for amounts to bad faith or fraud which entitles the passenger to the award of moral damages in accordance with Article 2220 [Ortigas v. Lufthansa (1975)].

Actual damages are recoverable, including, in case of death, liability for:  Loss of earning capacity; and  Support for a period not exceeding five years [Article 2206]. Under Article 2201, the liability for damages include:  In case the common carrier acted in good faith:

Willful and deliberate overbooking on the part of the airline carrier constitutes bad faith. Under Section 3, Economic Regulations No. 7 of the Civil Aeronautics Board, overbooking, which

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does not exceed ten percent, is not considered as deliberate and therefore does not amount to bad faith [United Airlines v. CA (2001)].

Bill of Lading

EXEMPLARY DAMAGES

 A bill of lading is a written acknowledgement, signed by the master of a vessel or other authorized agent of the carrier, that he has received the described goods from the shipper, to be transported on the expressed terms to the described place of destination, and to be delivered there to the designated consignee or parties [70 Am. Jur. 2d 924].  It is not, however, indispensable for the creation of a contract of carriage. [Cia. Maritima v. Ins. Co. of North America (1964)].  In the absence of a bill of lading, disputes shall be determined by the legal proofs which the parties may present in support of their respective claims, according to the general provisions established in the Code of Commerce for commercial contracts [Article 354, Code of Commerce].  The bill of lading becomes effective usually upon its delivery to and acceptance by the shipper [Aquino, Essentials of Transportation & Public Utilities Law (2011)].  In the absence of fraud, concealment, or improper conduct, it is presumed that the stipulations of the bill are known to the shipper, and he is generally bound by his acceptance whether he reads the bill or not [Magellan Mfg. Marketing Corp. v. CA (1991)].

DEFINITION

In a contract of carriage, exemplary damages may be awarded if the common carrier acted in wanton, fraudulent, reckless, oppressive, or malevolent manner [Article 2232].

NOMINAL, TEMPERATE, LIQUIDATED DAMAGES

AND

 Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated by the defendant, may be vindicated or recognized, not for the purpose of indemnifying the plaintiff for any loss suffered by him [Article 2221]. It may be awarded in case of breach of contract of carriage and in every case where any property right has been invaded [Article 2222].  Temperate or moderate damages, which are more than nominal but less than compensatory damages, may be recovered when some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be proved with certainty [Article 2224].  Liquidated damages are those damages agreed upon by the parties to a contract, to be paid in case of breach thereof [Article 2226].

ATTORNEY’S FEES

Under Article 2208, as applicable to a contract of carriage, attorney’s fees and expenses of litigation may be recovered in the following cases:  When exemplary damages are awarder;  When the common carrier’s act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest;  Where the common carrier acted in gross and evident bad faith in refusing to satisfy the plaintiff’s valid, just and demandable claim;  In any other case where the court deems it just and equitable that attorney’s fees and expenses of litigation should be recovered.

THREE-FOLD CHARACTER

 Receipt as to the quantity and description of the goods shipped;  Contract to transport and deliver the goods to the consignee or other person therein designated, on the terms specified in such instrument; and  Document of title, which makes it a symbol of the goods.

DELIVERY OF GOODS The goods should be delivered to the consignee or any other person to whom the bill of lading was validly transferred or negotiated.

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make use thereof without the others [Article 363, Code of Commerce];  When the goods are rendered useless for purposes of sale or consumption in the use for which they are properly destined, in which case the consignee may demand payment of the goods at current market prices [Article 365, Code of Commerce];  In case part of the goods is in good condition and separation is possible, the consignee may refuse to receive only the damaged goods [Article 365, Code of Commerce];  Where the delay is through the fault of the carrier [Article 371, Code of Commerce].

PERIOD OF DELIVERY

 Delivery should be made within the period fixed for the delivery of the goods as stipulated in the bill of lading [Article 370, Code of Commerce].  In case of failure to deliver, the carrier shall pay the indemnity agreed upon in the bill of lading, neither the shipper nor consignee being entitled to anything else.  Should there be no period previously fixed, the carrier is bound to forward the goods in the first shipment of the same or similar merchandise which he may make to the point of delivery. Should he not do so, he shall be liable for damages cause by the delay [Article 358, Code of Commerce].  If no indemnity is fixed and there is delay, the carrier shall be liable for the damages which may have been caused by the delay [Article 370, Code of Commerce].

 In case of dispute as to the condition of the goods, the same shall be examined by experts appointed by the parties, and the third one, in case of disagreement, appointed by the judicial authority.  If the persons interested should not agree with the report, said judicial authority shall order the deposits of the merchandise in a safe warehouse, and the parties interested shall make use of their rights in the proper manner. [Article 367, Code of Commerce].

DELIVERY WITHOUT SURRENDER OF BILL OF LADING

 After the contract has been complied with, the bill of lading which the carrier has issued shall be returned to him, and by virtue of the exchange of this title with the thing transported, the respective obligations and actions shall be considered cancelled, unless in the same act the claim which the parties may wish to reserve be reduced to writing, exception being made of the provisions of Article 366, on period for filing claims [Article 353, 2nd par., Code of Commerce].  If, in case of loss or for any other reason whatsoever, the consignee cannot return, upon receiving the merchandise, the bill of lading subscribed by the carrier, he shall give said carrier a receipt for the goods delivered. This receipt produces the same effects as the return of the bill of lading [Article 353, 3rd par., Code of Commerce].

PERIOD FOR FILING CLAIMS

Pursuant to Article 366, Code of Commerce, a claim, on account of damage found upon opening the packages, must be made against the carrier:  Within 24 hours, if the indications of the damage cannot be ascertained from the exterior of the packages (i.e., latent damage); or  At the time of receipt, if the indications damage can be so ascertained (i.e., patent damage). No claim whatsoever shall be admitted against the carrier with regard to the condition in which the goods transported were delivered:  After the periods mentioned have elapsed; or  After the transportation charges have been paid.

REFUSAL OF CONSIGNEE TO TAKE DELIVERY

The consignee may refuse to take delivery in the following cases:  If only part of the goods transported should be delivered, when he proves that he cannot

The periods mentioned commence upon delivery of cargo to the consignee at the place of destination

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Thus, Article 366 is limited to cases of claims for damage to goods actually turned over by the carrier and received by the consignee. It does not apply to misdelivery of goods.

The period for filing the claim is one year, in accordance with the Carriage of Goods by Sea Act. The Carriage of Goods by Sea Act, as adopted and embodied in Commonwealth Act No. 65, applies because it is a special law, and, as such, prevails over the general provisions of the Civil Code on prescription of actions [Maritime Agencies & Services, Inc. v. CA (1990)].

Failure to file a claim bars recovery [Aquino (2011)]. Ratio: The rule protects the carrier by affording it an opportunity to make an investigation of a claim while the matter is still fresh and easily investigated so as to safeguard itself from false and fraudulent claims [UCPB General Ins. Co., Inc. v. Aboitiz Shipping (2009)].

Maritime Commerce CHARTER PARTIES A charter party is a contract by virtue of which the owner or agent of a vessel binds himself to transport merchandise or persons for a fixed price. It is a contract by which the owner or agent of the vessel leases for a certain price the whole or portion of a vessel for the transportation of the goods or persons from one port to another.

However, the periods prescribed may be subject to modification by agreement of the parties. [PHILAMGEN v. Sweet Lines, Inc. (1992)].

PERIOD FOR FILING ACTIONS OVERLAND TRANSPORTATION AND COASTWISE SHIPPING

It is a contract whereby the whole or part of the ship is let by the owner to a merchant or other person for a specified time or use for the conveyance of goods, in consideration of the payment of freight [Caltex v. Sulpicio Lines (1999)].

The general rules under the Civil Code on extinctive prescription apply. Thus, action for damages must be filed in court:  Within 6 years, if a bill of lading was not issued [Article 1145, Civil Code].  Within 10 years, if a bill of lading was issued [Article 1146, Civil Code].

INTERNATIONAL GOODS BY SEA

CARRIAGE

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Towage is not a charter party. It is a contract for the hire of services by which a vessel is engaged to tow another vessel from one port to another for consideration.

OF

Suit must be brought within one year:  After delivery of the goods; or  From the date when the goods should have been delivered.

In modern maritime law and usage, there are three distinguishable types of charter parties: Bareboat or demise charter;  Time charter; and  Voyage or trip charter [Litonjua Shipping, Inc. v. National Seamen Board (1989)].

Otherwise, the carrier and the ship shall be discharged from all liability in respect of loss or damage.

Note: Both time and voyage charters are said to be contracts of affreightment, where a common or public carrier is not converted into a private carrier.

The absence of notice shall not affect or prejudice the right of the shipper to bring suit within one year after the delivery of the goods or the date when the goods should have been delivered [Section 3(6), Carriage of Goods by Sea Act].

A contract of affreightment is one in which the owner of the vessel leases part or all of its space to haul goods for others. It is a contract for special service to be rendered by the owner of the vessel and under such contract the general PAGE 91

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owner retains the possession, command and navigation of the ship, the charterer or freighter merely having use of the space in the vessel in return for his payment of the charter hire [Puromines, Inc. v. CA (1993)].

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is the right to utilize the carrying capacity and facilities of the vessel and to designate her destinations during the term of the charter [Litonjua Shipping Co., Inc. v. National Seamen Board (1989)].

BAREBOAT OR DEMISE CHARTER

VOYAGE OR TRIP CHARTER

 In a bareboat or demise charter, the ship owner leases to the charterer the whole vessel, transferring to the latter the entire command, possession and consequent control over the vessel’s navigation, including the master and the crew, who thereby become the charterer’s “servants” [Aquino (2011)].  To create a demise, the owner of a vessel must completely and exclusively relinquish possession, command and navigation thereof to the charterer, anything short of such a complete transfer is a contract of affreightment (time or voyage charter party) or not a charter party at all.  Although a charter party may transform a common carrier into a private one, the same, however, is not true in a contract of affreightment on account of the distinctions between a contract of affreightment and a demise or bareboat charter [Puromines, Inc. v. CA (1993)].

In a voyage charter, the vessel is leased for a single or particular voyage. The master and crew remain the employ of the owner of the vessel [Litonjua Shipping Co., Inc. v. National Seamen Board (1989)].

LIABILITY OF SHIP OWNERS AND SHIPPING AGENTS

 The ship owner has possession, control and management of the vessel and the consequent right to direct her navigation and receive freight earned and paid, while his possession continues; he is the person who is primarily liable for damages sustained in the operation of the vessel, based on the provisions of the Code of Commerce.  A ship agent is the person entrusted with the provisioning of a vessel, or who represents her in the port in which she happens to be [Article 595, Code of Commerce].  The ship agent, even though he is not the owner, is liable in every way to the creditor for losses and damages, without prejudice to his right against the owner, the vessel and its equipment and freight [Aquino (2011)].

Note: In a bareboat or demise charter, the common carrier is converted to private carrier. The charterer, to whom the owner of the vessel relinquishes, completely and exclusively, the possession, command and navigation of the vessel, by virtue of a demise charter, is considered the owner pro hac vice. He mans and equips the vessel and assumes all responsibility for navigation, management and operation. He thus acts as the owner of the vessel in all important aspects during the duration of the charter [Puromines, Inc. v. CA (1993)].

LIABILITY FOR ACTS OF CAPTAIN

The owner of a vessel and the agent shall be civilly liable for the acts of the captain and for the obligations contracted by the latter to repair, equip, and provision the vessel [Article 586, Code of Commerce]. The captain shall be liable to the agent, and the latter to third persons:  For all the damages suffered by the vessel and his cargo by reason of want of skill or negligence on his part;  For all the thefts committed by the crew, reserving his right of action against the guilty parties;  For the losses, fines, and confiscations imposed on account of violation of the laws

TIME CHARTER

 A time charter is a contract for the use of a vessel for a specified period of time or for the duration of one or more specified voyages.  In this case, the owner of a time-chartered vessel retains possession and control through the master and crew, who remain his employees. What the time charterer acquires

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

 

 

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and regulations of customs, police, health, and navigation; For the losses and damages caused by mutinies on board the vessel, or by reason of faults committed by the crew in the service and defense of the same, if he does not prove that he made full use of his authority to prevent or avoid them; For those arising by reason of an undue use of powers and non-fulfillment of the obligations which are his; For those arising by reason of his going out of his course or taking a course which he should not have taken without sufficient cause, in the opinion of the officers of the vessel at a meeting with the shippers or supercargoes who may be on board; For those arising by reason of his voluntarily entering a port other than that of his destination; For those arising by reason of non-observance of the provisions contained in the regulations on situation of lights and maneuvers for the purpose of preventing collisions [Article 618].

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hypothecated for such obligations or which stands as the guaranty for their settlement. It has its origin by reason of the conditions and risks attending maritime trade in its earliest years when such trade was replete with innumerable and unknown hazards since vessels had to go through largely uncharted waters to ply their trade. It was designed to offset such adverse conditions and to encourage people and entities to venture into maritime commerce despite the risks and the prohibitive cost of shipbuilding. Thus, the liability of the vessel owner and agent arising from the operation of such vessel were confined to the vessel itself, its equipment, freight, and insurance, if any, which limitation served to induce capitalists into effectively wagering their resources against the consideration of the large profits attainable in the trade [Aboitiz Shipping Corp. v. General Accident Fire and Life Assurance Corp. (1993)]. Thus, under the doctrine of abandonment:  The agent shall be civilly liable for the indemnities in favor of third persons which arise from the conduct of the captain in the care of the goods which the vessel carried, but he may exempt himself therefrom by abandoning the vessel with all her equipment and the freight he may have earned during the voyage [Article 587, Code of Commerce];  The owners of a vessel shall be civilly liable in the proportion of their contribution to the common fund, for the results of the acts of the captain, referred to in Article 587. Each part owner may exempt himself from this liability by the abandonment before a notary of the part of the vessel belonging to him [Article 590, Code of Commerce].  In case of collision, the liability of the ship owner shall be understood as limited to the value of the vessel with all her appurtenances and all the freight earned during the voyage [Article 837, Code of Commerce].  If the vessel and her freight should be totally lost, by reason of capture or wreck, all rights of the crew to demand any wages whatsoever shall be extinguished, as well as the agent for

The agent shall also be civilly liable for the indemnities in favor of third persons which arise from the conduct of the captain in the care of the goods which the vessel carried; but he may exempt himself therefrom by abandoning the vessel with all her equipment and the freight he may have earned during the voyage [Article 587, Code of Commerce]. Note: The owner or agent shall not be liable for the obligations contracted by the captain if the latter exceeds his powers and privileges. However, if the amounts claimed were made use of for the benefit of the vessel, the owner or agent shall be liable [Article 588, Code of Commerce].

DOCTRINE OF LIMITED LIABILITY (HYPOTHECARY RULE) STATEMENT OF THE RULE The real and hypothecary nature of maritime law simply means that the liability of the carrier in connection with losses related to maritime contracts is confined to the vessel, which is

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the recovery of the advances made [Article 643, Code of Commerce].

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SIMPLE AVERAGE  Particular or simple averages shall include all damages and expenses caused to the vessel or cargo that did not inure to the common benefit and profit of all persons interested in the vessel and her cargo [Article 809, Code of Commerce].  The owner of the goods which gave rise to the expense or suffered the damage shall bear this average [Article 810, Code of Commerce].

If the ship owner or agent may in any way be held civilly liable at all for injury to or death of passengers arising from the negligence of the captain in cases of collisions or shipwrecks, his liability is merely co-extensive with his interest in the vessel such that a total loss thereof results in its extinction. This is based on the exclusively “real and hypothecary nature” of maritime law, which operates to limit such liability to the value of the vessel, or to the insurance thereon, if any. [Yangco v. Laserna (1941)]

GENERAL AVERAGE General or gross averages shall include all the damages and expenses which are deliberately caused in order to save the vessel, her cargo, or both at the same time, from a real and known risk [Article 811, Code of Commerce].

Exceptions:  Claims under the Workmen’s Compensation Act [Abueg v. San Diego];  Expenses for repairing, provisioning and equipping the vessel;  There is an actual finding of negligence on the part of the vessel owner or agent [Aboitiz Shipping v. General Accident Fire and Life Assurance Corp. (1993)];  Vessel is insured, to the extent of the insurance proceeds [Vasquez v. CA (1985)];  There was no total loss;  Collision between two negligent vessels.

Requisites (1) There must be a common danger. This means, that both the ship and the cargo, after it has been loaded, are subject to the same danger, whether during the voyage, or in the port of loading or unloading, that the danger arises from the accidents of the sea, dispositions of the authority, or faults of men, provided that the circumstances producing the peril should be ascertained and imminent or may rationally be said to be certain and imminent. This last requirement excludes measures undertaken against a distant peril; (2) That for the common safety, part of the vessel or of the cargo or both is sacrificed deliberately; (3) That from the expenses or damages caused follows the successful saving of the vessel and cargo; (4) That the expenses or damages should have been incurred or inflicted after taking proper legal steps and authority [Magsaysay, Inc. v. Agan (1955)].

ACCIDENTS AND DAMAGES IN MARITIME COMMERCE AVERAGES

The following shall be considered averages:  All extraordinary or accidental expenses incurred during the navigation for the preservation of the vessel or cargo, or both;  All damages or deterioration the vessel may suffer from the time she puts to sea from the port of departure until she casts anchor in the port of destination, and those suffered by the merchandise from the time it is loaded in the port of shipment until it is unloaded in the port of consignment [Article 806, Code of Commerce].

The gross or general average shall be borne by those who benefited from the sacrifice. These include the ship owner and the owners of the cargoes that were saved. Contribution may also be imposed on the insurers of the vessel or cargoes that were saved, as well as lenders on bottomry or respondentia.

There are two kinds of averages:  Particular or simple average; and  Gross or general average.

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 If in lightening a vessel on account of a storm, in order to facilitate her entry into a port or roadstead, part of her cargo should be transferred to lighters or barges and be lost, the owner of said part shall be entitled to indemnity, as if the loss has originated from a gross average [Article 817, Code of Commerce];  If, as a necessary measure to extinguish a fire in a port; roadstead; creek, or bay, it should be decided to sink any vessel, this loss shall be considered gross average, to which the vessels saved shall contribute.

Cases of general average  The goods or cash invested in the redemption of the vessel or cargo captured by enemies, privateers, or pirates, and the provisions, wages, and expenses of the vessel detained during the time the arrangement or redemption is taking place;  The goods jettisoned to lighten the vessel, whether they belong to the vessel, to the cargo, or to the crew, and the damage suffered through said act by the goods kept;  The cables and masts which are cut or rendered useless, the anchors and the chains which are abandoned in order to save the cargo, the vessel, or both;  The expenses of removing or transferring a portion of the cargo in order to lighten the vessel and place her in condition to enter a port or roadstead, and the damage resulting therefrom to the goods removed or transferred;  The damage suffered by the goods of the cargo through the opening made in the vessel in order to drain her and prevent her sinking;  The expenses caused through floating a vessel intentionally stranded for the purpose of saving her;  The damage caused to the vessel which it is necessary to break open, scuttle, or smash in order to save the cargo;  The expenses of curing and maintaining the members of the crew who may have been wounded or crippled in defending or saving the vessel;  The wages of any member of the crew detained as hostage by enemies, privateers, or pirates, and the necessary expenses which he may incur in his imprisonment, until he is returned to the vessel or to his domicile, should he prefer it;  The wages and victuals of the crew of a vessel chartered by the month during the time it should be embargoed or detained by force majeure or by order of the Government, or in order to repair the damage caused for the common good;  The loss suffered in the value of the goods sold at arrivals under stress in order to repair the vessel because of gross average;  The expenses of the liquidation of the average [Article 811, Code of Commerce];

Procedure for recovery  Assembly and deliberation with the sailing mate and other officers;  Resolution of the captain adopted;  Hearing of the persons interested. In case an interested person should not be heard, he shall not contribute to the gross average [Article 813, Code of Commerce];  Resolution to be entered in the log book, stating the motives and reasons therefore as well as the votes and reason for disagreement [Article 814, Code of Commerce];  Minutes to be signed by all the persons present or in urgent cases, the captain;  Captain shall deliver one copy of the minutes to the maritime judicial authority of the first port he may make within 24 hours [Article 814, Code of Commerce];  Captain shall ratify the minutes under oath [Article 814, Code of Commerce].

COLLISIONS

 Collision is an impact or sudden contact between two moving vessels [Aquino (2011)].  Allision is the striking of a moving vessel against one that is stationary. ZONES OF COLLISION In all collisions between vessels at sea, there exist three divisions or zones of time:  The first division covers all the time up to the moment when the risk of collision may be said to have begun;  The second division covers the time between the moment when the risk of collision begins and the moment when it has become practically certain;

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 The third zone covers the time between the moment when the collision has become a practical certainty and the moment of actual contact [A. Urrutia & Co. v. Baco River Plantation Co. (1913)].

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sea disabling it to navigate [Article 819, Code of Commerce]. It is unlawful when:  The lack of provisions should arise from the failure to take the necessary provisions for the voyage, according to usage and custom, or if they should have been rendered useless or lost through bad stowage or negligence in their care;  The risk of enemies, privateers, or pirates should not have been well known or manifest, and based on positive and justifiable facts;  The injury to the vessel should have been caused by reason of her not being repaired, rigged, equipped, and arranged in a convenient manner for the voyage, or by reason of some erroneous order of the captain; or  Malice, negligence, want of foresight, or lack of skill on the part of the captain is the reason for the act causing the damage [Article 820, Code of Commerce].

Note: Liability in collision cases is negligencebased. The person who caused the injury is both civilly and criminally liable [Aquino (2011)]. SPECIFIC RULES  When only one vessel is at fault, the owner of the vessel at fault shall indemnify the losses and damages suffered, after an expert appraisal [Article 826, Code of Commerce];  When both vessels are at fault, each shall suffer its own damages, and both shall be solidarily responsible for the losses and damages occasioned to their cargoes [Article 826, Code of Commerce];  In case of inscrutable fault, that is, if it cannot be decided which of the two vessels was the cause of the collision, each shall bear his own damage and both shall be jointly responsible for the losses and damages suffered by their cargoes [Article 828, Code of Commerce];  When it is due to a fortuitous event, each vessel and its cargo shall bear its own damages [Article 830, Code of Commerce];  When, by reason of fortuitous event, a vessel properly anchored and moored collides with another, the injury occasioned shall be looked upon as particular average to the vessel run into [Article 832, Code of Commerce];  When a third vessel at fault, the owner of the third vessel shall indemnify the losses and damages caused, the captain thereof being civilly liable to said owner [Article 831, Code of Commerce].

SHIPWRECKS

 Shipwreck denotes loss or wreck of a vessel at sea as a consequence of running against another vessel or thing at sea or on coast where the vessel is rendered incapable of navigation.  If the wreck was due to malice, negligence or lack of skill of the captain, the owner of the vessel may demand indemnity from said captain. [Article 841, Code of Commerce].

SALVAGE

Salvage is defined as the service which one person renders to the owner of a ship or goods, by his own labor, preserving the goods or the ship which the owner or those entrusted with the care of them have either abandoned in distress at sea, or are unable to protect and secure.

ARRIVAL UNDER STRESS

Arrival under stress is the arrival of a vessel at the nearest and most convenient port instead of the port of destination, if during the voyage the vessel cannot continue the trip to the port of destination.

It is founded on equity and is compensation for actual services rendered.

It is lawful when the inability to continue voyage is due to lack of provisions, well-founded fear of seizure, privateers, pirates, or accidents of the

Three elements are necessary to a valid salvage claim:  A marine peril;

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 Service voluntarily rendered when not required as an existing duty or from a special contract;  Success, in whole or in part, or that the service rendered contributed to such success [Erlanger & Galinger v. Swedish East Asiatic Co. Ltd (1916)].

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 If damage is not patent or cannot be ascertained from the package, the shipper should file the claim with the carrier within three days from delivery.  Under Section 3(6), COGSA, a failure to file a notice of claim within three days will not bar recovery if it is nonetheless filed within one year. This one-year prescriptive period also applies to the shipper, the consignee, the insurer of the goods or any legal holder of the bill of lading. Inasmuch as the neither the Civil Code nor the Code of Commerce states a specific prescriptive period on the matter, the COGSA may be applied [Belgian Overseas Chartering and Shipping v. Philippine First Ins. Co. (2002)].

CARRIAGE OF GOODS BY SEA ACT (COGSA) APPLICATION

COGSA (Commonwealth Act No. 65) is a special law that governs all contracts of carriage of goods by sea between or to and from the Philippine ports.

PERIOD OF PRESCRIPTION

Its application is according to the following scheme:  If the common carrier is coming to the Philippines:  First: Civil Code;  Second: COGSA (in foreign trade);  Third: Code of Commerce;  If the private carrier is coming to the Philippines:  First: COGSA;  Second: Code of Commerce;  Third: Civil Code (excluding rules on common carriers);  If the private or common carrier is from the Philippines to a foreign country, the the law of the foreign country applies [Article 1753] unless the parties make COGSA applicable.

 The carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered.  The absence of a notice shall not affect or prejudice the right of the shipper to bring suit within one year after the delivery of the goods or the date when the goods should have been delivered [Section 3 (6)].  COGSA, as a special law, prevails over the general provisions of the Civil Code on prescription of actions [Maritime Agencies & Services, Inc. v. CA (1990)].

LIMITATION OF LIABILITY

 Under Section 4(5), COGSA, the limit is set at a maximum of $500 per package or customary freight unit.  This is deemed incorporated in the bill of lading even if not mention therein [Eastern Shipping v. IAC (1987)].  The declaration made by the shipper stating an amount bigger than $500 per package will make the carrier liable for such bigger amount, but only if the amount so declared is the real value of goods [Aquino (2011)].  The Civil Code does not limit the liability of the common carrier to a fixed amount per package. In all matters not regulated by the Civil Code, the right and the obligations of common carriers shall be governed by the Code of Commerce and special laws. Thus,

Under Article 1766, in all matters not regulated by the Civil Code, the rights and obligations of common carriers shall be governed by the Code of Commerce and special laws. Thus, although a special law, COGSA only applies when the Civil Code has no provision dealing with the matter.

NOTICE OF LOSS OR DAMAGES

 Notice of claim and the general nature of the loss or damage must be given in writing to the carrier or his agent at the port of discharge before or at the time of the removal of the goods [Section 3(6), COGSA].

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the COGSA, which is suppletory to the provisions of the Civil Code, supplements the latter by establishing a statutory provision limiting the carrier’s liability in the absence of a shipper’s declaration of a higher value in the bill of lading. [Belgian Overseas v. Philippine First Ins. Co. (2002)].

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The carrier is liable for damages for:  Death or injury of a passenger if the accident causing it took place:  On board the aircraft;  In the course of the operations of embarking or disembarking; or  When there was delay [Article 17 and 19, Warsaw Convention];  Destruction, loss, or damage to any baggage or goods that are checked in, if damage occurred:  During the transportation by air; or  When there was delay [Section 18 and 19, Warsaw Convention];  Delay in the transport by air of passengers, baggage or goods.

The Warsaw Convention APPLICABILITY

The Warsaw Convention applies to:  All international carriage of persons, baggage, or cargo performed by aircraft for reward;  Gratuitous carriage by aircraft performed by an air transport undertaking [Article 1(1), Warsaw Convention].

The carriage by air contemplated comprises the period in which the baggage or goods are in charge of the carrier, whether in an airport or on board an aircraft, or, in the case of a landing outside an airport, in any place whatsoever [Article 18, Warsaw Convention].

International air carriage or international air transport means transportation by air between points of contact of two high contracting parties, or those countries that have acceded to the Warsaw Convention, wherein the place of departure and the place of destination are situated:  Within the territories of two high contracting parties, regardless of whether or not there be a break in the transportation or a transshipment; or  Within the territory of a single high contracting party, if there is an agreed stopping place within a territory subject to the sovereignty, mandate or authority of another power, even though the power is not a party to the Convention [Article 1(2), Warsaw Convention].

LIMITATION OF LIABILITY With respect to the following limitations of liability, Article 23, Warsaw Convention provides that any provision tending to relieve the carrier of liability or to fix a lower limit than that which is laid down shall be null and void, but the nullity of any such provision does not involve the nullity of the whole contract. Also, under Article 25, Warsaw Convention:  The carrier shall not be entitled to avail himself of the provisions which exclude or limit his liability, if the damage is caused by his wilful misconduct or by such default on his part as is considered to be equivalent to wilful misconduct;  Similarly the carrier shall not be entitled to avail himself of the said provisions, if the damage is caused as aforesaid by any agent of the carrier acting within the scope of his employment.

A carriage to be performed by several successive air carriers is deemed, for the purposes of the Convention, to be one undivided carriage, if it has been regarded by the parties as a single operation, whether it had been agreed upon under the form of a single contract or of a series of contracts [Article 1(3), Warsaw Convention].

Under Article 29, Warsaw Convention, the right to damages under the WC is extinguished after two years from the date of arrival at the destination or from the date on which the aircraft ought to have arrived, or from the date

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on which the carriage stopped. The method of calculating the period of limitation shall be determined by the law of the court seized of the case.

otherwise no special or extraordinary form of resulting injury [Alitalia Airways v. CA (1990)].

WILLFUL MISCONDUCT A common carrier may not avail of the limitation in the following cases:  Willful misconduct;  Default amounting to willful misconduct [Article 25, Warsaw Convention];  Accepting passengers without ticket [Article 3(2), Warsaw Convention];  Accepting goods without airway bill or baggage without baggage check.

LIABILITY TO PASSENGERS

General rule: In the carriage of passengers, the liability of the carrier for each passenger is limited to 250,000 francs passenger. Exception: By special contract, the carrier and the passenger may agree to a higher limit [Article 22(1), Warsaw Convention].

LIABILITY FOR CHECKED BAGGAGE

Receipt by the person entitled to the delivery of baggage or cargo without complaint is prima facie evidence that the same have been delivered in good condition and in accordance with the document of carriage [Article 26, Warsaw Convention].

General rule: In the carriage of baggage and goods, the liability of the carrier is limited to 250 francs per kilogram. Exception: The limit does not apply when the consignor has made, at the time when the package was handed over to the carrier, a special declaration of the value at delivery and has paid a supplementary sum if the case so requires. In that case the carrier will be liable to pay a sum not exceeding the declared sum, unless he proves that that sum is greater than the actual value to the consignor at delivery [Article 22(2), Warsaw Convention].

LIABILITY BAGGAGE

FOR

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HAND-CARRIED

 As regards hand-carried baggage, the liability of the carrier is limited to 5,000 francs per passenger [Article 22(3), Warsaw Convention].  The Guatemala Protocol of 1971 increased the limit for passengers to $100,000 and to $1,000 for baggage. However, the Supreme Court noted in Santos III v. Northwest Orient Airlines (1992), that the Guatemala Protocol is still ineffective [Sundiang and Aquino (2013)].  The Warsaw Convention should be deemed a limit of liability only in those cases where the cause of death or injury to person, or destruction, loss or damage to property or delay in its transport is not attributable to or attended by any willful misconduct, bad faith, recklessness, or otherwise improper conduct on the part of any official or employee for which the carrier is responsible; and there is

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Corporation

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Doctrine of Separate Personality Yutivo Sons Hardware v. CTA (1961): A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those persons composing it as well as from any other legal entity to which it may be related.

DEFINITION

A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence. [Sec. 2, unless otherwise indicated, all sections cited herein are from B.P. 68, or the Corporation Code]

(2) Created by operation of law  Mere consent of the parties to form a corporation is not sufficient. The State must give its consent either through a special law (in case of government corporations) or a general law (i.e., Corporation Code in case of private corporations).  A corporation comes into existence upon the issuance of the CERTIFICATE OF INCORPORATION. Then and only then will it acquire juridical personality to sue and be sued, enter into contracts, hold or convey property or perform any legal act in its own name.

ATTRIBUTES OF THE CORPORATION (1) An Artificial Being A corporation exists by fiction of law. Hence, it can act only through its directors, officers and employees. Shipside, Inc. v. Court of Appeals (2001): Being only a juridical entity, the physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws or by a special act of the Board of Directors.

(3) Has the right of succession Its continued existence during its stated term cannot be affected by any change in the members or stockholders or by any transfer of shares by a stockholder to a 3rd person.

Moral Damages NAPOCOR v. Philipp Brothers Oceanic (2001): Moral damages cannot be awarded in favor of corporations because they do not have feelings and mental state. They may not even claim moral damages for besmirched reputation.

(4) Has the powers, attributes and properties expressly authorized by law or incident to its existence Monfort Hermanos Agricultural Dev. Corp. v. Monfort III (2004): A corporation has no power except those expressly conferred on it by the Corporation Code and by its articles of incorporation, those which may be incidental to such conferred powers, those that are implied from its existence, and those reasonably necessary to accomplish its purposes. In turn, a corporation exercises said powers through its Board of Directors and/or its duly authorized officers and agents.

Pilipinas Broadcasting Network v. Ago Medical and Educational Center (2005): However, a corporation can recover moral damages under Art 2219 (7) if it was the victim of defamation. Criminal Liability West Coast Life Ins. Co. v. Hurd (1914); Time Inc. v. Reyes (1971): Since a corporation as a person is a mere legal fiction, it cannot be proceeded against criminally because it cannot commit a crime in which personal violence or malicious intent is required. Criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the corporation itself.

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prohibition in its Articles of Incorporation or in its by-laws for it to declare dividends, such corporation is a stock corporation.

STOCK CORPORATION (ASKED IN ‘01 AND ‘04)

OTHER CORPORATIONS

(a) Public corporation (Asked in ‘04) – One formed or organized for the government of a portion of the state. Its purpose is for the general good and welfare [Sec. 3, Act 1456].

 Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of shares held [Sec. 3]  It is organized for profit.  The governing body of a stock corporation is usually the Board of Directors (except in certain instances, e.g. close corporations).

Polytechnic University of the Phils. v. Court of Appeals (2001): Beyond cavil, a governmentowned and controlled corporation has a personality of its own, distinct and separate from that of the government, and the intervention in a transaction of the Office of the President through the Executive Secretary does not change the independent existence of a government entity as it deals with another government entity.

NON-STOCK CORPORATION (ASKED IN ‘04)

 All other corporations are non-stock corporations [Sec. 3]  One where no part of the income is distributable as dividends to its members, trustees, or officers, subject to the provisions of the Code on dissolution [Sec. 87].  Not organized for profit.  Its governing body is usually the Board of Trustees. However, non-stock corporations may, through their articles of incorporation or their by-laws, designate their governing boards by any name other than as board of trustees [Sec. 138].

Boy Scouts of the Philippines v. COA (2011): Not all corporations, which are not government owned or controlled, are ipso facto to be considered private corporations as there exists another distinct class of corporations or chartered institutions which are otherwise known as “public corporations.” These corporations are treated by law as agencies or instrumentalities of the government which are not subject to the tests of ownership or control and economic viability but to different criteria relating to their public purposes/interests or constitutional policies and objectives and their administrative relationship to the government or any of its Departments or Offices.  As presently constituted, the BSP is a public corporation created by law for a public purpose. It is not a private corporation which is required to be owned or controlled by the government and be economically viable to justify its existence under a special law.

CIR v. Club Filipino de Cebu (1962): There are two elements for a stock corporation to exist: 1) Capital stock divided into shares, and 2) An authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of shares held. (Test of WON a stock corporation) Even if there is a statement of capital stock, the corporation is still NOT a stock corporation if dividends are NOT supposed to be declared, that is, there is no distribution of retained earnings.

(b) Private corporation (Asked in ‘04) – One formed for some private purpose, benefit, aim or end [Sec. 3, Act 1456]; it may be either stock or non-stock, government-owned or controlled or quasi-public.

Note: Under Sec. 43 of the Corporation Code, a corporation is deemed to have the power to declare dividends. Thus, so long as the corporation has capital stock and there is no

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Philippines. Thus, the Roman Catholic Church can acquire lands in the Philippines even if it is headed by the Pope.

Baluyot v. Holganza (2000): The TEST to determine whether a corporation is government-owned or –controlled, or private in nature, is if a corporation is created by its own charter for the exercise of a public function, or by incorporation under the general corporation law.

Corporation aggregate is a religious corporation incorporated by more than one person. (f) Eleemosynary corporation– One organized for a charitable purpose

(c) Close corporation - One whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class.

(g) Domestic corporation– One formed, organized, or existing under the laws of the Philippines. (h) Foreign corporation – One formed, organized or existing under any laws other than those of the Philippines and whose law allows Filipino citizens and corporations to do business in its own country and state (Sec. 123). (i) Corporation created by special laws or charter - Corporations which are governed primarily by the provisions of the special law or charter creating them. Corporation Code has suppletory application. [Sec. 4]

Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. [Sec. 96]

(j) Subsidiary corporation – One in which control, usually in the form of ownership of majority of its shares, is in another corporation (the parent corporation).

(d) Educational corporation – One organized for educational purposes [Sec. 106].

(k) Parent corporation – Its control lies in its power, directly or indirectly, to elect the subsidiary’s directors thus controlling its management policies.  Holding company – a parent company which has no other business aside from the holding of the shares of its subsidiaries which it controls  Investment company – a parent company which holds shares in other corporations not for the purpose of controlling them but merely to invest therein

(e) Religious corporations Corporation sole is one formed for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect, or church, by the chief archbishop, bishop, priest, rabbi, or other presiding elder of such religious denomination, sect or church [Sec.110] Roman Catholic Apostolic, etc v. Register of Deeds of Davao City (1957): A corporation sole has no nationality but for the purpose of applying nationalization laws, nationality is determined not by the nationality of its presiding elder but by the nationality of its members constituting the sect in the

(l) Corporation De Jure – A corporation organized in accordance with the requirements of the law. (m) De facto corporation – A corporation where there exists a flaw in its incorporation.

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Rule on De Facto Corporations - The due incorporation of any corporation claiming in good faith to be a corporation under this Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding (Sec. 20).

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Sec. 21. All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof. Provided, however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.

Grant of juridical personality is an exercise of State power and not a matter of private affair. Consequently, under the de facto corporation doctrine, the defect in the juridical personality of a corporation cannot be inquired into by private individuals, much less used as a defense to avoid claims, except in quo warranto proceedings brought on behalf of the State where the main action is to question the validity or existence of such juridical personality (Villanueva).

One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation. International Express Travel v. CA (2000): The doctrine of estoppel applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation. It does not apply to a third party who is not trying to escape liability from the contract but rather is the one claiming from the contract.

Requisites of De Facto Corporation: (1) There is an apparently valid statute under which the corporation may be formed; (2) There has been colorable compliance with the legal requirements in good faith; and (3) There has been user of corporate powers, i.e. the transaction of business as if it were a corporation. [Campos, 1990]

De Facto Corporation vs. Corporation by Estoppel  Where all the requisites of a De Facto corporation are present, the defectively formed corporation will have the status of a De Jure corporation in all cases brought by or against it, except only as to the State in a direct proceeding.  If any of the requisites is absent, then the Estoppel doctrine can apply but ONLY IF under the circumstances of the particular case then before the court, either (a) the defendant association is estopped from defending on the ground of its lack of capacity to be sued, or (b) the defendant third party had dealt with the plaintiff as a corporation and is deemed to have admitted its existence.

Hall v. Piccio (1950): An association of persons cannot claim to be a corporation if it has not been issued a certificate of incorporation since it cannot claim good faith compliance with the requirements of the law. (k) Corporation by estoppel – Where a group of persons misrepresent themselves as a corporation, they are subsequently estopped from claiming lack of corporate life in order to avoid liability; also, a third party who had dealt with an unincorporated association as a corporation is precluded from denying its corporate existence on a suit brought by the alleged corporation on the contract.

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Nationality of Corporations

Gamboa v. Teves (G.R. No. 176579, June 28, 2011): “The term "capital" in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock (common and nonvoting preferred shares).

PLACE OF INCORPORATION TEST

The corporation is a national of the country under whose laws it is organized or incorporated [Sec. 123]. Domestic corporations – organized governed under and by Philippine laws

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The 60 percent of the "capital" assumes, or should result in, "controlling interest" in the corporation. Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered.

and

Foreign Corporations – organized under laws other than those of the Philippines and can operate only in the territory of the state under whose laws it was formed. However, they may be licensed to do business here [Campos].

For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.

CONTROL TEST A corporation shall be considered a Filipino corporation if the Filipino ownership of its capital stock is at least 60%, and where the 6040 Filipino-alien equity ownership is NOT in doubt [SEC Opinion dated 6 November 1989; DOJ Opinion No. 18, s. 1989]. Therefore, its shareholdings in another corporation shall be considered to be of Filipino nationality when computing the percentage of Filipino equity of that second corporation [SEC Opinion dated 23 November 1993].

Individuals or juridical entities not meeting the aforementioned qualifications are considered as non-Philippine nationals.” Gamboa v. Teves, (G.R. No. 176579, October 9, 2012): (The SC reversed the previous 2011 ruling) “Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting control of the corporation but also to the beneficial ownership of the corporation, it is therefore imperative that such requirement apply uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation. Under the Corporation Code, capital stock consists of all classes of shares issued to stockholders, that is, common shares as well as preferred shares, which may have different rights, privileges or restrictions as stated in the articles of incorporation.

Control test is applied in the following:  Exploitation of natural resources - “Only Filipino citizens or corporations whose capital stock are at least 60% owned by Filipinos can qualify to exploit natural resources.” [Sec. 2, Art. XII, Consti.]  Public Utilities “xxx no franchise, certificate or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens. “ [Sec. 11, Art. XII, Consti.]

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rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution must apply not only to shares with voting rights but also to shares without voting rights. Preferred shares, denied the right to vote in the election of directors, are anyway still entitled to vote on the eight specific corporate matters mentioned above under Section 6 of the Corporation Code. Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture of common and preferred nonvoting shares, at least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60 percent of such shares must necessarily be owned by Filipinos.

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(a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.

GRANDFATHER RULE

Method used to determine the nationality of a corporation, in cases where corporate shareholders are present in the situation, by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, is computed by attributing the nationality of second or even subsequent tier ownership to determine the nationality of the corporate shareholder [Villanueva].

In short, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares. This uniform application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the constitutional command that the ownership and operation of public utilities shall be reserved exclusively to corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities, as mandated by the Constitution.”

SEC Opinion re: Silahis Intl Hotel (May 4, 1987): It involves the computation of Filipino ownership of a corporation in which another corporation of partly Filipino and partly foreign equity owns capital stock. The percentage of shares held by the second corporation in the first is multiplied by the latter’s own Filipino equity, and the product of these percentages is determined to be the ultimate Filipino ownership of the subsidiary corporation. The Grandfather Rule must be applied to accurately determine the actual participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or business. Redmont Consolidated Mines, Corp v. McArthur Mining, Inc., et al. (2010): Compliance with the constitutional limitation(s) on engaging in nationalized activities must be determined by ascertaining if 60% of the investing corporation’s outstanding capital stock is owned by “Filipino citizens”, or as interpreted, by natural or individual Filipino citizens. If such investing corporation is in turn owned to some extent by another investing corporation, the same process must be observed. One must not stop until the citizenships of the individual or natural stockholders of layer after layer of investing corporations have been established, the very essence of the Grandfather Rule.

SEC Memorandum Circular No. 8 dated 20 May 2013  Sec. 1. Covered corporations: All corporations engaged in identified areas of activities or enterprises specifically reserved, wholly or partly, to Philippine Nationals by the Constitution, the FIA and other existing laws, amendments thereto and IRRs of said laws except as may otherwise be provided therein.  Sec. 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH

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Corporate Juridical Personality

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LIABILITY FOR TORTS AND CRIMES PNB v. CA (1978): As a separate juridical personality, a corporation can be held liable for torts committed by its officers for corporate purpose.

A private corporation formed or organized under this code commences to have corporate existence and juridical personality and is deemed incorporated from the date the SEC issues a certificate of incorporation under its official seal [Sec. 19]

RECOVERY OF MORAL DAMAGES

General Rule: A Corporation has the power to sue in its corporate name. [Sec. 36]

DOCTRINE OF SEPARATE JURIDICAL PERSONALITY (ASKED IN ‘95, ‘96, ‘99 AND ‘00)

Exception: NAPOCOR v. Philipp Brothers Oceanic (2001): Moral Damages cannot be awarded in favor of corporations because they do not have feelings and mental state. They may not even claim moral damages for besmirched reputation.

Concept  A corporation has a personality separate and distinct from that of its stockholders and members and is not affected by the personal rights, obligations, and transactions of the latter.  Merely a legal fiction for purposes of convenience and to sub-serve the ends of justice

Pilipinas Broadcasting Network v. Ago Medical and Educational Center (2005): HOWEVER, a corporation can recover moral damages under Art 2219 (7) if it was the victim of defamation. Constitutional Rights Bataan Shipyard & Eng’g Co. v. PCGG (1987): Corporate entities are entitled to due process, equal protection, and protection against unreasonable searches and seizures. However, a corporation is not entitled to the privilege against self-incrimination.

Land Bank of the Philippines v. CA (2001): A corporation, upon coming into existence, is invested by law with a personality separate and distinct from the persons comprising it as well as from any other legal entity to which it may be related. By this attribute, a stockholder may not, generally, be made to answer for acts or liabilities of said corporation, and vice versa.

DOCTRINE OF PIERCING THE CORPORATE VEIL

Property Wise & Co. v. Man Sun Lung, (1940): Stockholders have no claim on corporate property as owners, but mere expectancy or inchoate right to the same upon dissolution of the corporation after all corporate creditors have been paid. Such right is limited only to their equity interest (doctrine of limited liability). Although a stockholder’s interest in the corporation may be attached by his personal creditor, corporate property cannot be used to satisfy his claim.

Koppel Phil v. Yatco (1946): Piercing the veil of corporate entity is merely an equitable remedy, and may be granted only in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime (Yutivo Sons v. CTA, 1961) or where the corporation is a mere alter ego or business conduit of a person. Land Bank of the Philippines v. CA (2001): In order to disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. In the absence of any malice or bad faith, a stockholder or an officer of a corporation cannot be made personally liable for corporate

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liabilities. The mere fact that a stockholder owns majority of the stock of a corporation is not a ground to conclude that said stockholder and corporation are one and the same.

A: It is settled that a corporation has a personality separate and distinct from its individual stockholders or members, and is not affected by the personal rights, obligations and transactions of the latter. The corporation may not be held liable for the obligations of the persons composing it, and neither can its stockholders be held liable for its obligation. Of course, this Court has recognized instances when the corporation’s separate personality may be disregarded. However, we have also held that the same may only be done in cases where the corporate vehicle is being used to defeat public convenience, justify wrong, protect fraud, or defend crime. Moreover, the wrongdoing must be clearly and convincingly established. It cannot be presumed.

Suldao v. Cimech System Construction, Inc. (2006): The veil of corporate fiction treats as separate and distinct the affairs of a corporation and its officers and stockholders. As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud and proof of it.

TEST IN DETERMINING APPLICABILITY

General Rule: The mere fact that a corporation owns all or substantially all of the stocks of another corporation is NOT sufficient to justify their being treated as one entity.

GROUNDS FOR APPLICATION OF DOCTRINE

The corporate fiction may be pierced if used:  To defraud the government of taxes due it.  To evade payment of civil liability.  By a corporation which is merely a conduit or alter ego of another corporation.  To evade compliance with contractual obligations.  To evade financial obligation to its employees. PNB v. Andrada Electric & Engineering Co. (2002): Only in these and similar instances may the veil be pierced and disregarded: to ward off a judgment credit, to avoid inclusion of corporate assets as part of the estate of the decedent, to escape liability arising from a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives to cover up an otherwise blatant violation of the prohibition against forum shopping. Seaoil vs Autocorp Group [2008, Nachura]: Q: Is a corporation liable for the individual acts of its stockholders or members? Is there an exception to the general rule?

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Exception: The subsidiary is a mere instrumentality of the parent corporation. PNB v. Ritratto Group (2001): Circumstances rendering subsidiary an instrumentality:  The parent corporation owns all or most of the subsidiary’s capital stock.  The parent and subsidiary corporations have common directors or officers.  The parent corporation finances the subsidiary.  The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation.  The subsidiary has grossly inadequate capital.  The parent corporation pays the salaries and other expenses or losses of the subsidiary.  The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation.  In the papers of the parent corporation or in the statements of its officers, the subsidiary is

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described as a department or division of the parent corporation or its business or financial responsibility is referred to as the parent corporation’s own.  The parent corporation uses the property of the subsidiary as its own.  The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation in the latter’s interest.  The formal ledger requirements of the subsidiary are not observed.

 Adoption or ratification of the ENTIRE contract after incorporation. Note: Builders’ Duntile Co. v. Dunn Mfg. Co. (1929): A corporation’s power to adopt a contract (by its promoters) must be understood to be limited to such contracts as the corporation itself, after its organization, would be authorized to make.

Incorporation and Organization

Rizal Light v. PSC and Morong Electric (1968): The Court’s ruling in Cagayan Fishing v. Teodoro Sandiko, that “a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business”, is NOT ABSOLUTE. One of the exceptions recognized by American courts is that “a contract made by the promoters of a corporation on its behalf may be adopted, accepted or ratified by the corporation when organized”.  Acceptance of benefits under the contract with knowledge of the terms thereof.  Performance of its obligation under the contract

Novation or the intent to novate the original contract is required to adopt or ratify the preincorporation contract. [Campos, 1990]

PROMOTER Promoters are persons who, acting alone or with others, take initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor (RA 8799, The Securities Regulation Code).

LIABILITY OF PROMOTER

General Rule: The promoter binds himself PERSONALLY & assumes the responsibility of looking to the proposed corporation for reimbursement.

NUMBER AND QUALIFICATIONS OF INCORPORATORS [SEC. 10]

Exceptions: (1) Express or implied agreement to the contrary (2) Novation, not merely adoption or ratification of the contract

(1) Natural Persons (2) Any number from 5-15 (3) Majority are residents of the Philippines (4) Each incorporator must own or be a subscriber to at least 1 share of the capital stock of the corporation

LIABILITY OF CORPORATION FOR PROMOTER’S CONTRACTS General Rule Cagayan Fishing Development Co., Inc. v. Sandiko (1937): A corporation is NOT bound by the contract. A corporation, until organized, has no life and no legal existence. It could not have had an agent (the promoter) who could legally bind it.

CORPORATE NAME— LIMITATIONS ON USE OF CORPORATE NAME Corporate name [Sec. 18] (1) Must not be identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law

Exceptions: A corporation may be bound by the contract if it makes the contract its own by:

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(2) Not patently deceptive, confusing or contrary to existing laws Required by law to include the “Corporation” or “Inc.” [Campos, 1990]

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MINIMUM CAPITAL STOCK AND SUBSCRIPTION REQUIREMENTS [SEC. 12]

word

NONE—stock corporations incorporated under the Corporation Code shall not be required to have a minimum authorized capital stock

Change of corporate name requires the amendment of the AOI: majority vote of the board and the vote or written assent of stockholders holding 2/3 of the outstanding capital stock [Sec. 16].

EXCEPT as provided for by special law and subject to the provisions of Sec. 13

AMOUNT OF CAPITAL STOCK TO BE SUBSCRIBED AND PAID FOR THE PURPOSES OF INCORPORATION

Republic Planters Bank v. CA (1992): Amendment of a corporation’s AOI changing its corporate name does not extinguish the personality of the original corporation. It is the same corporation with a different name, and its character is not changed. Consequently, the “new” corporation is still liable for the debts and obligations of the “old” corporation.

[SEC. 13]

(1) At the time of incorporation, at least 25% of the authorized capital stock stated in the AOI should be subscribed; (2) At least 25% of the total subscription must be paid upon subscription; (3) The balance to be payable on  Dates fixed in the subscription contract or  Upon call by the BOD in the absence of fixed dates (4) The paid-up capital can in no case be lower than P5,000.00

CORPORATE TERM [SEC. 11]

General Rule: A corporation shall exist for a period not exceeding 50 years from the date of incorporation Exceptions: (1) Sooner dissolved (2) Period extended  For periods not exceeding 50 years in any single instance by an amendment of the AOI  Extensions may not be made earlier than 5 years prior to the original or subsequent expiry date(s) o EXCEPT: If the SEC determines that there are justifiable reasons for an earlier extension

ARTICLES OF INCORPORATION NATURE ARTICLES

AND

FUNCTION

OF

 Constitutes the charter of the corporation and sets forth the rules and conditions upon which the association or corporation is founded  Defines the contractual relationships between the State and the corporation, the stockholders and the State, and the corporation and the stockholders

Rationale: Benguet Consolidated Mining Co. v. Pineda (1956): Corporations are creatures of the law through the State legislature. The State is therefore concerned that this privilege be enjoyed by corporations only “under the conditions and not beyond the period that it sees fit to grant; and particularly, that it not be abused in fraud and to the detriment of other parties; and for this reason, it has been ruled that the limitation to a definite period is an exercise of control in the interest of the public.

The Articles must be filed with the SEC for the issuance of the Certificate of Incorporation.

CONTENTS (1) CORPORATE NAME (a) Must not be identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law

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(b) Not patently deceptive, confusing or contrary to existing laws

MERCANTILE LAW

(2) PURPOSE CLAUSE  Must indicate the PRIMARY and SECONDARY purposes if there is more than one purpose, which should not contradict or change the nature of the corporation (Sec. 14(2))  Must not be patently unconstitutional, illegal, immoral, and contrary to government rules and regulations (Sec. 17 (2)).

Lyceum of the Philippines v. CA (1993): The policy underlying the prohibition against the registration of a corporate name which is “identical or deceptively or confusingly similar” to that of any existing corporation or which is “patently deceptive or patently confusing” or “contrary to existing laws” is: (1) The avoidance of fraud upon the public which would have occasion to deal with the entity concerned; (2) The prevention of evasion of legal obligations and duties, and (3) The reduction of difficulties of administration and supervision over corporations.

People v. United Medical Service, 200 N.E. 157, cited in Campos: Must not be for the purpose of practicing a profession. Ulep v. The Legal Clinic (1993): Under the present state of our law and jurisprudence, a corporation cannot be organized for or engage in the practice of law in this country. This interdiction, just like the rule against unethical advertising, cannot be subverted by employing some so-called paralegals supposedly rendering the alleged support services. The remedy for the apparent breach of this prohibition is the concern and province of the Solicitor General who can institute the corresponding quo warranto action, after due ascertainment of the factual background and basis for the grant of the corporate charter, in light of the putative misuse thereof.

To determine whether a given corporate name is "identical" or "confusingly or deceptively similar" with another entity's corporate name, one must evaluate corporate names in their entirety. SEC Memo Circ. No.5, s.2008: The corporate name shall contain the word “Corporation” or “Incorporated”, or the abbreviations “Corp.” or “Inc.” respectively. SEC Memo Circ. No. 12, s. 2008: Business or trade name which is different from the corporate name shall be indicated in the articles of incorporation. A company may have more than one business or trade name.

(3) PRINCIPAL OFFICE  Must be within the Philippines [Sec. 14 (3)]  AOI must specify both province or city or town where it is located Sundiang and Aquino citing SEC Circular No. 32006: A specific address is now required; Metro Manila is no longer allowed.

Change of corporate name requires the amendment of the AOI: majority vote of the board and the vote or written assent of stockholders holding 2/3 of the outstanding capital stock [Sec. 16].

Chua Gan vs. Samahang Magsasaka (1935): Important for (1) determining venue in an action by or against the corporation, and (2) determining the province where a chattel mortgage of shares should be registered.

Republic Planters Bank v. CA (1992): Amendment of a corporation’s AOI changing its corporate name does not extinguish the personality of the original corporation. It is the same corporation with a different name, and its character is not changed. Consequently, the “new” corporation is still liable for the debts and obligations of the “old” corporation.

Hyatt Elevators v. Goldstar Elevators (2005): The residence of a corporation is the place where its principal office is located, as stated in its Articles of Incorporation. To insist that the proper venue is the actual principal office and not that stated in its Articles of Incorporation

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 If with par value shares, the par value of each share [Sec. 14(8), Sec. 15(7)].  names, citizenship and residences of original subscribers  amount subscribed and paid on each subscription  fact that some or all shares are without par value

would indeed create confusion and work untold inconvenience. Enterprising litigants may, out of some ulterior motives, easily circumvent the rules on venue by the simple expedient of closing old offices and opening new ones in another place that they may find well to suit their needs. (4) CORPORATE TERM  Maximum life of 50 years.  Extendible for a period not exceeding 50 years at any one instance. No extension, however, can be made earlier than 5 years before the end of the term. [Sec. 11]

(8) IF NON-STOCK:  amount of capital  names, nationalities & residences contributors  amount contributed by each

Extension requires an amendment of the AOI subject to the exercise of appraisal right by the dissenting stockholder [Sec. 37].

of

(9) AMOUNT PAID BY EACH SUBSCRIBER ON THEIR SUBSCRIPTION, WHICH SHALL NOT BE LESS THAN 25% OF SUBSCRIBED CAPITAL AND SHALL NOT BE LESS THAN P5,000 [SEC. 15 (8 & 9)]

(5) NAMES, CITIZENSHIP AND RESIDENCES OF INCORPORATORS

(10) NAME OF TREASURER ELECTED BY THE SUBSCRIBERS [SEC. 15 (10)]

(6) NUMBER, NAMES, CITIZENSHIP AND RESIDENCES OF DIRECTORS/TRUSTEES. (ASKED IN ‘05 AND ‘08) Stock corporations: DIRECTORS Non-stock corporations: TRUSTEES

(11) OTHER MATTERS  Classes of shares, as well as preferences or restrictions on any such class [Sec. 6].  Denial or restriction of pre-emptive right [Sec.39].  Prohibition against transfer of stock which would reduce stock ownership to less than the required minimum in the case of a nationalized business or activity [Sec. 15(11)].  No transfer clause J.G. Summit Holdings, Inc. v. CA (2005): If the foreign shareholdings of a landholding corporation exceeds 40%, it is not the foreign stockholders’ ownership of the shares which is adversely affected but the capacity of the corporation to own land – that is, the corporation becomes disqualified to own land. No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land.

General Rule: Not less than 5 but not more than 15 directors/trustees Exception: Non-stock corporations whose articles or by-laws may provide for more than 15 trustees [Sec. 92] Educational non-stock corporations:  trustees may NOT be less than 5 NOR exceed 15  number of trustees shall be in multiples of 5 [Sec. 108] Nationalized or partially-nationalized industries: Aliens may be directors but only in such number as may be proportional to their allowable ownership of shares (7) IF STOCK CORPORATION:  authorized capital stock in lawful money of the Philippines  the number of shares into which the ACS is divided

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o Stating the fact that the amendment or amendments have been duly approved by the required vote of the stockholders or members

AMENDMENT Amendment of the Articles of Incorporation [Sec. 16] Any provision or matter stated in the articles of incorporation may be amended  By a majority vote of the board of directors or trustees  And the vote or written assent of o 2/3 of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, o 2/3 of the members if it be a non-stock corporation.

The following items are amendable under Sec. 16:  Change of name of the Corporation  Adding to or changing the purpose/s  Change of principal office  Change in the number of directors or trustees  Increase or decrease in authorized capital stock (subject to Sec. 38)

NON-AMENDABLE ITEMS

Limitations:  Cannot effect amendment when it will contravene any provision of requirement imposed by the Code or by special laws  The amendment must be for a legitimate purpose  Must be approved by the directors/trustees and the stockholders/members through the vote requirement  Appraisal Right  Both the original and the amended articles together must contain all the provisions required by law to be set out in the articles.  If the corporation is governed by a special law the amended articles must be accompanied by a favorable recommendation of the appropriate government agency to the effect that such amendment is in accordance with law [Lopez, 2004]  Will take effect only o Upon their approval by the SEC by the issuance of a certificate of amended articles o Or from the date of filing with the SEC if not acted upon within 6 months from the date of filing for a cause not attributable to the corporation Procedure:  The original and amended articles together shall contain all provisions required by law to be set out in the articles of incorporation  The articles, as amended shall be indicated by underscoring the change or changes made  A copy shall be submitted to the SEC o Duly certified under oath by the corporate secretary and a majority of the directors or trustees

The following items state accomplished facts, therefore, cannot be amended:  The names, nationalities and residences of the incorporators (Otherwise, an amendment would go against the definition of “incorporators” in Sec. 5)  First set of directors or trustees  Original stock subscriptions and paid-in capital  Treasurer-in-trust  Place and date of execution  Witnesses [De Leon] Notes: AOI must be accompanied by Treasurer’s sworn statement of compliance with Sec. 13 on amount of capital to be subscribed and paid for the purposes of incorporation; otherwise, SEC shall not accept the AOI. [Sec. 14]

REGISTRATION AND ISSUANCE OF CERTIFICATE OF INCORPORATION REGISTRATION OF THE ARTICLES OF INCORPORATION DOCUMENTS TO BE FILED WITH SEC (ASKED IN ‘02): (1) Articles of incorporation (2) Treasurer’s Affidavit certifying that 25% of the total authorized capital stock has been subscribed and at least 25% of such has been fully paid in cash or property

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(3) Bank certificate covering the paid-up capital. (Note: Current SEC rules no longer require this if payment for shares is made in cash) (4) Letter authority authorizing the SEC to examine the bank deposit and other corporate books and records to determine the existence of paid-up capital (5) Undertaking to change the corporate name in case there is another person or entity with same or similar name that was previously registered (6) Certificate of authority from proper government agency whenever appropriate like BSP for banks and Insurance Commission for insurance corporations. [Sundiang and Aquino]

MERCANTILE LAW

ADOPTION OF BY-LAWS ADOPTION OF BY-LAWS [SEC. 46]

May be done either:  Prior to incorporation - approved and signed by all the incorporators & submitted to SEC together with AOI; or  After incorporation - within 1 month after receipt of official notice of the issuance of its certificate of incorporation by the SEC.

EFFECT OF FAILURE TO FILE THE BYLAWS WITHIN THE PERIOD Loyola Grand Villas Homeowners Association v. CA (1997): Does not imply the "demise" of the corporation. By-laws may be required by law for an orderly governance and management of corporations but they are not essential to corporate birth. Therefore, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation.

ISSUANCE OF CERTIFICATE OF INCORPORATION BY SEC Effect: Commencement of corporate existence and juridical personality [Sec. 19]

Note: Section 22 on the effect of failure to formally organize within 2 years from incorporation, the corporation’s corporate powers cease and the corporation is deemed dissolved. Organization includes: the filing & approval of by-laws with the SEC and the election of directors and officers [Campos, 1990].

REVOCATION of certificate of incorporation: If incorporators are found guilty of fraud in procuring the same after due notice and hearing [Sec. 6(i), PD 902-A]

GROUNDS FOR DISAPPROVING AOI:

[SEC. 17]

 AOI does not SUBSTANTIALLY comply with the form prescribed  Purpose is patently unconstitutional, illegal, immoral, contrary to government rules and regulations  Treasurer’s Affidavit concerning the amount of capital subscribed and or paid is false  Required percentage of ownership of Filipino citizens has not been complied with.

SMC v. Mandaue Packing Products Plants Union – FFW (2005): “By-laws” has traditionally been defined as regulations, ordinances, rules or laws adopted by an association or corporation or the like for its internal governance, including rules for routine matters such as calling meetings and the like. The importance of by-laws to a labor organization cannot be gainsaid. Without such provisions governing the internal governance of the organization, such as rules on meetings and quorum requirements, there would be no apparent basis on how the union could operate. Without a set of by-laws which provides how the local/chapter arrives at its decisions or otherwise wields its attributes of legal personality, then every action of the local/chapter may be put into legal controversy.

REMEDY in case of rejection of AOI - petition for review in accordance with the Rules of Court [Sec. 6, last par., PD 902-A] SEC shall give the incorporators reasonable time to correct or modify objectionable portions of the articles or amendment [Sec. 17].

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However, if those key by-law provisions on matters such as quorum requirements, meetings, or on the internal governance of the local/chapter are themselves already provided for in the constitution, then it would be feasible to overlook the requirement for by-laws. Indeed in such an event, to insist on the submission of a separate document denominated as “By-Laws” would be an undue technicality, as well as a redundancy.

BINDING EFFECTS

 ONLY from date of issuance of SEC of certification that by-laws are not inconsistent with the Code  Pending approval, they CANNOT bind stockholders or corporation

AMENDMENT OR REVISION

Effected by: MAJORITY vote of the members of the BOARD and MAJORITY VOTE OF THE OWNERS of the OCS or members, in a meeting duly called for the purpose

NATURE AND FUNCTIONS OF BYLAWS  Product of agreement of stockholders/members and establish rules for internal government of corporation [Campos, 1990]  “A rule or law of a corporation for government” [13 Am. Jur., 283]

MERCANTILE LAW

DELEGATION TO THE BOD OF POWER TO AMEND OR REPEAL BY-LAWS By vote of stockholders representing 2/3 of the OCS or 2/3 of the members

the the the its

HOW DELEGATION REVOKED Any power delegated to the board of directors or trustees to amend or repeal any by-laws or adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting.

China Banking Corp v CA (1997): Mere internal rules among stockholders and cannot affect or prejudice 3rd persons who deal with the corporation unless they have knowledge of the same.  “According to its function, by-laws may be defined as the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it.” [9 Fletcher Cyc. Corp., 1963 rev. ed., Sec. 4166 at 622 cited in Lopez, 1994]

Corporate Powers GENERAL POWERS, THEORY OF GENERAL CAPACITY [SEC. 36]

(1) Sue and be sued in its corporate name; (2) Succession; (3) Adopt and use a corporate seal; (4) Amend its Articles of Incorporation; (5) Adopt by-laws; (6) For stock corporations - issue or sell stocks to subscribers and sell treasury stocks; for non-stock corporation - admit members to the corporation; (7) Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, pursuant to its lawful business; (8) Enter into merger or consolidation with other corporations as provided in the Code; (9) Make reasonable donations, including those for the public welfare or for hospital,

REQUISITES OF VALID BY-LAWS

 Must be approved by the affirmative vote of the stockholders representing MAJORITY of the outstanding capital stock or majority of members (If filed pre-incorporation: must be approved and signed by all incorporators)  Must be kept in the principal office of the corporation, subject to inspection of stockholders or members during office hours [Sec. 74] Grace Christian High School v. CA (1997): No provision of the by-laws can be adopted if it is contrary to law.

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charitable, cultural, scientific, civic, or similar purposes: Provided, no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; (10) Establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and (11) Exercise such other powers as may be essential or necessary to carry out its purposes

MERCANTILE LAW

(d) Appraisal right may be exercised by the dissenting stockholder for BOTH extension and shortening of corporate term (See also Sec. 81) INCREASE OR DECREASE CAPITAL STOCK

[SEC. 38]

INCUR, CREATE OR INCREASE BONDED INDEBTEDNESS [SEC. 38] (a) Same requirements above from a-c (b) A certificate in duplicate must be signed by a majority of the directors of the corporation (countersigned by the chairman and the secretary of the SH meeting), setting forth: (1) That requirements of this section have been complied with (2) The amount of the increase or diminution of the capital stock (3) In case of increase, (a) the amount of capital stock or number of shares of no-par stock actually subscribed (b) names, nationalities and residences of the persons subscribing (c) the amount of no-par stock subscribed by each (d) the amount paid by each on his subscription, or the amount of capital stock or number of shares of no-par stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend (4) any bonded indebtedness to be incurred, created or increased (5) the actual indebtedness of the corporation on the day of the meeting (6) the amount of stock represented at the meeting (7) the vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness (c) prior approval of SEC is required (d) duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the SEC, attached in the original articles of incorporation. (i) From and after approval of the SEC of its certificate of filing, the capital stock shall stand increased or decreased and the

Note: The Corporation has implied powers which are deemed to exist because of the following provisions:  “Except such as are necessary or incidental to the exercise of the powers so conferred” [Sec. 45]  “Such powers as are essential or necessary to carry out its purpose or purposes as stated in the AOI” – catch-all phrase [Sec. 36(11)].

SPECIFIC POWERS, THEORY OF SPECIFIC CAPACITY [SEC. 37-44]

(a) Power to Extend or Shorten Corporate Term (b) Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded Indebtedness (c) Power to Deny Pre-Emptive Rights (d) Power to Sell or Dispose of Corporate Assets (e) Power to Acquire Own Shares (f) Power to Invest Corporate Funds in Another Corporation or Business (g) Power to Declare Dividends (h) Power to Enter Into Management Contract EXTEND OR SHORTEN THE CORPORATE TERM [SEC. 37] (a) Must be approved by majority vote of the Board of Directors/ Board of Trustees (BOD/BOT) (b) Ratified at a meeting by SH representing 2/3 of the outstanding capital stock/ 2/3 of members of non-stock corporations (c) Written notice of meeting (includes proposed action, time and place of meeting) shall be addressed to each SH/member at his place of residence and deposited to the addressee in the post office, or served personally

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incurring, creating or increasing of any bonded indebtedness authorized (ii) SEC shall not accept for filing any certificate of increase unless accompanied by the sworn statement of the treasurer of the corporation showing: (a) That at least 25% of such increased capital stock have been subscribed and (b) that at least 25% of the amount subscribed has been paid or that there has been transferred to the corporation property the value of which is equivalent to 25% of the subscription (c) SEC shall not approve any decrease in the capital stock if its effect shall prejudice the rights of corporate creditors (e) Bonds issued by a corporation shall be registered with the SEC

MERCANTILE LAW

without further action or approval by the SH/ members (e) Corporation is not restricted in its power to sell or dispose of its assets without the authorization of SH or members: (i) if the same is necessary in the usual and regular course of business of the corporation or (ii) if the proceeds of the sale will be appropriated for the conduct of its remaining business Caltex (Phils.) Inc. v. PNOC Shipping and Transport Corp. (2006): While the Corporation Code allows the transfer of all or substantially all the properties and assets of a corporation, the transfer should not prejudice the creditors of the assignor. The only way the transfer can proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the assignor. The acquisition by the assignee of all or substantially all of the assets of the assignor necessarily includes the assumption of the assignor’s liabilities, unless the creditors who did not consent to the transfer choose to rescind the transfer on the ground of fraud. To allow an assignor to transfer all its business, properties and assets without the consent of its creditors and without requiring the assignee to assume the assignor’s obligations will defraud the creditors. The assignment will place the assignor’s assets beyond the reach of its creditors.

DENY PREEMPTIVE RIGHT [SEC. 39]  All SH of a Stock Corporation have preemptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings  Except if such right is denied by the AOI or an amendment thereto  Pre-emptive right shall not extend to: (a) shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public (b) shares to be issued in good faith with the approval of 2/3 of the stockholders representing outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt

ACQUIRE ITS OWN SHARES [SEC. 41] (a) For a legitimate corporate purpose/s, including but not limited to the following: (i) To eliminate fractional shares arising out of stock dividends (ii) To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and (iii) To pay dissenting or withdrawing stockholders (b) Provided there are unrestricted retained earnings (URE) in the corporate books to cover the shares purchased or acquired

SELL OR DISPOSE OF SUBSTANTIALLY ALL ITS ASSETS [SEC. 40] (a) Same requirements from a-c as Sec. 37 above (b) Any dissenting SH may exercise his appraisal right (c) Deemed to cover substantially all the corporate property and assets (d) After authorization by the SH/members, the BOD/BOT may abandon such sale, lease, exchange, mortgage, pledge or other disposition, subject to the rights of third parties under any contract relating thereto,

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INVEST IN ANOTHER CORPORATION OR BUSINESS [SEC. 42] (a) Same requirements from a-c as Sec. 37 above (b) Any dissenting SH shall have appraisal right (c) Where the investment is reasonably necessary to accomplish the corporation’s primary purpose, the approval of the SH/ members is not necessary

MERCANTILE LAW

(c) Any cash dividend due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses (d) Stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid (e) Should be approved by 2/3 of SH representing the outstanding capital stock at a regular/special meeting called for that purpose (f) Stock corporations- prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock, except: (i) When justified by definite corporate expansion projects or programs approved by the BOD (ii) When the corporation is prohibited under any loan agreement with any financial institution or creditor from declaring dividends without its consent, and such consent has not yet been secured (iii) When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation

Notes:  If it is for the same purpose, or incidental, or related to its PRIMARY purpose, the board can invest the corporate fund WITHOUT the consent of the stockholders. No appraisal right.  If the investment is in another corporation of different business or purpose BUT in pursuance of the SECONDARY purpose, the affirmative vote of majority of the board consented by stockholders/ members is required.  If the investment is OUTSIDE the purpose/s for which the corporation was organized, AOI must be amended first, otherwise it will be an Ultra Vires act.

Nielson & Co. v. Lepanto Consolidated Mining (1968): Under Section 16 of the Corporation Law stock dividends cannot be issued to a person who is not a stockholder in payment of services rendered.

De La Rama v. Ma-ao Sugar Central Co. (1969): A private corporation, in order to accomplish its purpose as stated in its articles of incorporation, and subject to the limitations imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and other evidences of indebtedness of any domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose, does not need the approval of the stockholders; but when the purchase of shares of another corporation is done solely for investment and not to accomplish the purpose of its incorporation, the vote of approval of the stockholders is necessary.

A corporation may legally issue shares of stock in consideration of services rendered to it by a person not a stockholder, or in payment of its indebtedness. A share of stock issued to pay for services rendered is equivalent to a stock issued in exchange of property, because services is equivalent to property. However, it is the shares of stock that are originally issued by the corporation and forming part of the capital that can be exchanged for cash or services rendered, or property. A share of stock coming from stock dividends declared cannot be issued to one who is not a stockholder of a corporation.

DECLARE DIVIDENDS [SEC. 43] (a) Out of URE (b) Payable in cash, in property, or in stock to all SH on the basis of outstanding stock held by them

ENTER INTO MANAGEMENT CONTRACTS

[SEC. 44]

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managing and the managed corporation at a meeting duly called for that purpose (b) Should be approved by the 2/3 of stockholders owning outstanding capital stock/members of the managed corporation when: (i) A stockholder or stockholders representing the same interest of both the managing and managed corporations own more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation; or (ii) A majority of the members of the BOD of the managing corporation also constitute a majority of the BOD of the managed corporation (c) No management contract shall be entered into for a period longer than 5 years for any one term (d) a-c above applies to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such are called service contracts, operating agreements or otherwise (e) Service contracts or operating agreements which relate to exploration, development, exploitation or utilization of natural resources may be entered into for such periods as may be provided in the pertinent laws and regulations

Types of Ultra Vires Acts  Acts done beyond the powers of the corporation as provided in the law or its articles of incorporation;  Acts or contracts entered into in behalf of a corporation by persons who have no corporate authority (Note: This is technically ultra vires acts of officers and not of the corporation);  Acts or contracts, which are per se illegal as being contrary to law. [Villanueva]

Notes: 2 general restrictions on the power of the corporation to acquire and hold properties:  property must be reasonably and necessarily required by the business  that the power shall be subject to the limitations prescribed by other special laws and the Constitution (corporation may not acquire more than 30% of voting stocks of a bank; corporations are restricted from acquiring public lands except by lease of not more than 1000 hectares)

CONSEQUENCES OF ULTRA VIRES ACTS  Executed contract – courts will not set aside or interfere with such contracts;  Executory contracts – no enforcement even at the suit of either party (void and unenforceable);  Partly executed and partly executory – principle of “no unjust enrichment at expense of another” shall apply;  Executory contracts apparently authorized but ultra vires – the principle of estoppel shall apply.

APPLICABILITY OF ULTRA VIRES DOCTRINE Montelibano v. Bacolod-Murcia Milling Co., Inc., G.R. No. 15092, May 18, 1962: It is a question, therefore, in each case of the logical relation of the act to the corporate purpose expressed in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote and fanciful sense, it may fairly be considered within the charter powers. The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation’s business, fairly incident to the express powers and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not.

ULTRA VIRES ACTS

Ultra Vires Acts

Definition - Ultra Vires acts are those acts which a corporation is not empowered to do or perform because they are not conferred by its AOI or by the Corporation Code, or not necessary or incidental to the exercise of the powers so conferred [Sec. 45].

Illegal Acts

Not necessarily Unlawful; against law, unlawful, but outside morals, public policy, the powers of the and public order corporation

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Ultra Vires Acts Can be ratified

CORPORATION LAW

MERCANTILE LAW

HOW (CORPORATE POWERS) EXERCISED

Illegal Acts Cannot be ratified

BY THE SHAREHOLDERS

Can bind the parties if Cannot bind the parties wholly or partly executed

Corporate Acts Requiring Approval of Stockholders or Members (Voting and NonVoting Shares)

Seaoil vs. Autocorp Group [2008, Nachura]: An ultra vires act is distinguished from illegal act, the former being voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated.

General Rule: Vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights [Sec. 6] Exceptions: (Sec. 6) Voting and non-voting shares shall be entitled to vote in the following cases: (1) Amendment of AOI (2) Adoption, Amendment and Repeal of ByLaws [Sec. 48] (3) Sale, Lease, Mortgage or Other Disposition of Substantially all corporate assets [Sec. 40] (4) Incurring, Creating or Increasing Bonded Indebtedness [Sec. 38] (5) Increase or Decrease of Capital Stock [Sec. 38] (6) Merger and Consolidation [Sec. 76-80] (7) Investment of funds in another corporation or business or for any purpose other than the primary purpose for which it was organized [Sec. 42]

Pirovano v. De La Rama Steamship Co. (1954): A distinction should be made between corporate acts or contracts which are illegal and those which are merely ultra vires. The former contemplates the doing of an act which is contrary to law, morals, or public policy or public duty, and are, like similar transactions between the individuals void. They cannot serve as basis of a court action, nor require validity. Ultra vires acts on the other hand, or those which are not illegal and void ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may become binding and enforceable when ratified by the stockholders. REMEDIES IN CASE OF ULTRA VIRES ACTS  State - Dissolution of the corporation thru a quo warranto proceeding - Injunction - Suspension or revocation of the certificate of registration by the SEC  Stockholders - Injunction - Derivative suit  Creditors - Nullification of contract in fraud of creditors

Requisites [Sec. 42] (Asked in 95):  Approval of majority of the board of directors or trustees  Ratification by the stockholders representing at least 2/3 of the OCS or the members at a meeting duly called for the purpose  Written notice addressed to each stockholder or member at his place of residence as shown on the books of the corporation  Appraisal right available to dissenting stockholders or members (8) Dissolution of the Corporation(Sec. 118-121)

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 Their act must be supported by a MAJORITY OF THE QUORUM duly assembled (Exception: Election of officers requires a vote of majority of ALL the members of the board)  The act must be within the powers conferred to the Board.

Corporate Acts Requiring Approval of Stockholders or Members (Voting Shares Only)  Declaration of Stock Dividends [Sec. 43]  Management Contracts [Sec. 44]  Fixing the Consideration of No-Par shares [Sec. 62]  Fixing the Compensation of Directors [Sec. 30]

BY THE OFFICERS Corporate Officer

Corporate Employee

BY THE BOARD OF DIRECTORS Position is provided for Employed through the in the by-laws or under action of the managing the Corporation Code officer of the corporation

Board as Repository of Corporate Powers GENERAL RULE (Doctrine of Centralized Management) The corporate powers of the corporation shall be exercised, all business conducted, and all property of controlled and held by the board of directors or trustees. [Sec. 23]

RTC has jurisdiction in NLRC has jurisdiction case of labor dispute in case of labor disputes Who are Corporate Officers [Sec. 25]  President – must be a director;  Treasurer – may or may not be a director; as a matter of sound corporate practice, must be a resident and citizen of the Phil (SEC opinion)  Secretary – need not be a director unless required by the by-laws; must be a resident and citizen of the Philippines; and  Other officers as may be provided in the bylaws.

Exceptions:  Executive Committee duly authorized in the by-laws [Sec. 35];  A contracted manager which may be an individual, a partnership, or another corporation. Note: In case the contracted manager is another corporation, the special rule in Sec. 44 applies.  In case of close corporations, the stockholders may manage the business of the corporation rather than by a board of directors, if the AOI so provide [Sec. 97]

Note: Any two (2) or more positions may be held concurrently by the same person, EXCEPT that no one shall act as president and secretary or as president and treasurer at the same time.

Spouses Constantine Firme v. Bukal Enterprises and Development Corporation (2003): The power to purchase real property is vested in the board of directors or trustees. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the board, whose approval will finalize the transaction.

Additional qualifications of officers may be provided for in the by-laws [Sec. 47(5)]. Matling Industrial and Commercial Corp. v. Coros (2010): Conformably with Section 25 of the Corporation Code, a position must be expressly mentioned in the by-Laws in order to be considered as a corporate office. Thus, the creation of an office pursuant to or under a byLaw enabling provision is not enough to make a position a corporate office. Guerrea v. Lezama (1958), the first ruling on the matter, held that the only officers of a corporation were those given that character either by the Corporation Code or by the By-Laws; the rest of the

Requisites of a VALID Corporate Act by the Board of Directors [Sec. 25]:  The Board must act as a BODY in a meeting. (Note: Current SEC regulations allow BOD meetings by teleconferencing or videoconferencing)  There must be a VALIDLY constituted meeting.

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corporate officers could be considered only as employees or subordinate officials.

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prejudiced if he had the right to presume under the circumstances the authority of the acting officers.

A different interpretation can easily leave the way open for the Board of Directors to circumvent the constitutionally guaranteed security of tenure of the employee by the expedient inclusion in the By-Laws of an enabling clause on the creation of just any corporate officer position.

Associated Bank v. Pronstroller [2008, Nachura]: Q: What is the Doctrine of Apparent Authority? A: If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority.

Real v. Sangu Philippines (2011):  “An ‘office’ is created by the charter of the corporation and the officer is elected (or appointed) by the directors or stockholders” (Easycall Communications Phils., Inc. v. King, 2005).  “Corporate officers’ in the context of PD No. 902-A are those officers of the corporation who are given that character by the Corporation Code or by the corporation’s bylaws. There are three specific officers whom a corporation must have under Section 25 of the Corporation Code. These are the president, secretary and the treasurer. The number of officers is not limited to these three. A corporation may have such other officers as may be provided for by its by-laws like, but not limited to, the vice-president, cashier, auditor or general manager. The number of corporate officers is thus limited by law and by the corporation’s by-laws” [Garcia v. Eastern Telecommunications Philippines, Inc., 2009].

TRUST FUND DOCTRINE Philippine Trust Co. v. Rivera (1923): Under Sec. 43 of Code, the corporation can declare dividends only out of "unrestricted retained earnings;" and that under Sec. 122, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. These provisions in essence provide for the "trust fund doctrine" where the "subscription to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims." Ong Yong v. Tiu (2003): "The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. v. Rivera' provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims.

Disqualifications [Sec. 27]  Convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years  Convicted by final judgment of a violation of the Corporation Code committed within 5 years prior to the date of his election or appointment. This includes violations of rules and regulations issued by the SEC to implement the provisions of the Corporation Code.

This doctrine is the underlying principle in the procedure for the distribution of capital assets, embodied in Corporation Code, which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock, (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings, and (3) dissolution and eventual liquidation of the corporation.

Authority of Corporate Officers A person dealing with a corporate officer is put on inquiry as to the scope of the latter’s authority but an innocent person cannot be

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Furthermore, the doctrine is articulated in Sec. 41 on the power of a corporation to acquire its own shares and in Sec. 122 on the prohibition against the distribution of corporate assets and property unless the stringent requirements therefore are complied with.

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the doctrine when the corporation is insolvent encompasses not only the capital stock, but also other property and assets generally regarded in equity as a trust fund for the payment of corporate debts. All assets and property belonging to the corporation held in trust for the benefit of creditors that were distributed or in the possession of the stockholders, regardless of full payment of their subscriptions, may be reached by the creditor in satisfaction of its claim.

Boman Environmental Development Corporation v. CA (1988): Trust Fund Doctrine means that the capital stock, properties and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. Stated simply, the trust fund doctrine states that all funds received by the corporation in payment of the shares of stock shall be held in trust for the corporate creditors and other stockholders of the corporation. Under such doctrine no fund shall be used to buy back the issued shares of stock except only in instances specifically allowed by the Corporation Code.

Also, under the trust fund doctrine, a corporation has no legal capacity to release an original subscriber to its capital stock from the obligation of paying for his shares, in whole or in part, without a valuable consideration, or fraudulently, to the prejudice of creditors. The creditor is allowed to maintain an action upon any unpaid subscriptions and thereby steps into the shoes of the corporation for the satisfaction of its debt.

Steinberg v. Velasco (1929): The creditors of a corporation have the right to assume that so long as there are debts and liabilities, the Board of Directors will not use corporate assets to purchase its own shares of stock or to declare dividends to its stockholders when the corporation is insolvent.

To make out a prima facie case in a suit against stockholders of an insolvent corporation to compel them to contribute to the payment of its debts by making good unpaid balances upon their subscriptions, it is only necessary to establish that the stockholders have not in good faith paid the par value of the stocks of the corporation.

NTC v. CA (1999): The subscribed capital is the same amount that can loosely be termed as the “trust fund” of the corporation. The “Trust Fund” doctrine considers this subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the redemption of redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own shares using the subscribed capital as the consideration therefor.

Board of Directors and Trustees DOCTRINE OF MANAGEMENT

CENTRALIZED

BOARD IS SEAT OF CORPORATE POWERS

General Rule: Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation,

Donnina Halley v. Printwell, Inc. (2011): The trust fund doctrine is not limited to reaching the stockholder’s unpaid subscriptions. The scope of

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who shall hold office for one (1) year until their successors are elected and qualified. [Sec. 23]

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lodged in the board, subject to the articles of incorporation, by-laws, or relevant provisions of law. In the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation.

Exceptions  In case of an Executive Committee duly authorized in the by-laws; [Sec. 35]  In case of a contracted manager which may be an individual, a partnership, or another corporation Note: In case the contracted manager is another corporation, the special rule in Sec. 44 applies.

However, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to its officers, committees or agents. The authority of these individuals to bind the corporation is generally derived from law, corporate by-laws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business.

 In case of close corporations, the stockholders may manage the business of the corporation rather than by a board of directors, if the AOI so provide. [Sec. 97]

REQUISITES OF A VALID CORPORATE ACT BY THE BOARD OF DIRECTORS (1) The Board must act as a BODY in a meeting. (2) There must be a VALIDLY constituted meeting. (3) There act must be supported by a MAJORITY OF THE QUORUM duly assembled (Exception: Election of officers requires a vote of majority of ALL the members of the board) (4) The act must be within the powers conferred to the Board.

Spouses Constantine Firme v. Bukal Enterprises and Development Corporation (2003): The power to purchase real property is vested in the board of directors or trustees. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the board, whose approval will finalize the transaction. Great Asian Sales Center Corp v. CA, (2002): The Corporation Code of the Philippines vests in the board of directors the exercise of the corporate powers of the corporation, save in those instances where the Code requires stockholders’ approval for certain specific acts.

LIMITATIONS ON POWERS OF BOARD OF DIRECTORS/TRUSTEES  Limitations imposed by the Constitution, statutes, articles of incorporation or by-laws;  Certain acts of the corporation that require joint action of the stockholders and board of directors: - Removal of director [Sec. 28] - Amendments of AOI [Sec. 16] - Fundamental changes [Sec. 6] - Declaration of stock dividends [Sec. 43] - Entering into management contracts [Sec. 44] - Fixing of consideration of non-par shares [Sec. 62] - Fixing of compensation of directors [Sec. 30]  Cannot exercise powers not possessed by the corporation.

Gamboa v. Teves, (2011): Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the corporation. This is exercised through his vote in the election of directors because it is the board of directors that controls or manages the corporation. Banate v. Philippine Countryside Rural Bank, (2010): Section 23 of the Corporation Code expressly provides that the corporate powers of all corporations shall be exercised by the board of directors. The power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation are

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done with the exercise of their business judgment.

PRINCIPLE ON DELEGATION OF BOARD POWER People’s Aircargo v. CA, (1998): Under Sec 23, the power and the responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in the board, subject to the articles of incorporation, by-laws, or relevant provisions of law. However, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate by-laws or authorization from the board, either expressly or impliedly by habit, custom or acquiescence in the general course of business,.

Exceptions  When the Corporation Code expressly provides otherwise  When the Directors or officers acted with fraud, gross negligence or in bad faith.  When Directors or officers act against the corporation in conflict of interest situation. [Villanueva]

REMEDIES IN CASE OF MISMANAGEMENT

 Receivership  Injunction if the act has not yet been done  Dissolution if abuse amounts to a ground for quo warranto but Solicitor General Refuses to act  Derivative suit or complaint filed with the SEC (now the RTC) [PD 902-A]

BUSINESS JUDGMENT RULE General Rule: Directors cannot be held liable for mistakes or errors in the exercise of their business judgment if they acted in good faith, with due care & prudence. Contracts intra vires entered into by the board of directors are binding upon the corporation & courts will not interfere.

Note: Dean Villanueva opined that a derivative suit may be an exception to such Rule: this occurs when it is apparent that the Board is not in a position to validly exercise its business judgment for the protection of the corporation, e.g., when the Board itself has committed an act causing damage to the corporation or when the Board is placed in a conflict of interests scenario whereby it is unlikely that it would use such business discretion to file such suit for the best interest of the corporation.

Exception: If the contracts are so unconscionable & oppressive as to amount to a wanton destruction of the rights of the minority or if they violate their duties under Sections 31 & 34.

TENURE, QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS OR TRUSTEES

CONSEQUENCES OF THE BUSINESS JUDGMENT RULE

Sec. 23 embodies the essence of the “Business Judgment Rule,” that unless otherwise provided in the Code, all corporate powers and prerogatives are vested directly in the Board of Directors. Consequently:  The resolution, contracts and transactions of the board cannot be overturned or set aside by the stockholders or members and not even by the courts under the principle that the business of the corporation has been left to the hands of the board  Directors and duly authorized officers cannot be held personally liable for acts or contracts

TENURE

Directors shall hold office for one (1) year until their successors are elected and qualified [Sec. 23]. Term: One (1) year Tenure: The period within which the director actually holds office, including the holdover period after the end of his term.

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Valle Verde Country Club v. Africa, 2009:  In several cases, we have defined "term" as the time during which the officer may claim to hold the office as of right, and fixes the interval after which the several incumbents shall succeed one another. The term of office is not affected by the holdover. The term is fixed by statute and it does not change simply because the office may have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a successor has not been elected and has failed to qualify.  Term is distinguished from tenure in that an officer’s "tenure" represents the term during which the incumbent actually holds office. The tenure may be shorter (or, in case of holdover, longer) than the term for reasons within or beyond the power of the incumbent.  Based on the above discussion, when Section 23 of the Corporation Code declares that "the board of directors…shall hold office for one (1) year until their successors are elected and qualified," we construe the provision to mean that the term of the members of the board of directors shall be only for one year; their term expires one year after election to the office. The holdover period – that time from the lapse of one year from a member’s election to the Board and until his successor’s election and qualification – is not part of the director’s original term of office, nor is it a new term; the holdover period, however, constitutes part of his tenure.

Lee v. CA (1992): With the omission of the phrase "in his own right" the election of trustees and other persons who in fact are not beneficial owners of the shares registered in their names on the books of the corporation becomes formally legalized. Hence, this is a clear indication that in order to be eligible as a director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books of the corporation.

QUALIFICATIONS

ELECTIONS

DISQUALIFICATIONS [SEC. 27]

 Convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years; or  A violation of the Corporation Code, committed within five years from the date of his election. This includes violations of rules and regulations issued by the SEC to implement the provisions of the Corporation Code. Gokongwei, Jr. v. SEC (1979): An amendment to the corporation’s by-laws which renders a stockholder ineligible to be a director, if he be also a director in a corporation whose business is in competition with that of the other corporation, has been sustained as valid. This is based upon the principle that where the director is so employed in the service of a rival company, he cannot serve both, but must betray one or the other. Such an amendment "advances the benefit of the corporation and is good."

 If STOCK, director must own at least 1 share of the capital stock, which stock shall stand in his own name [Sec. 23]. o Exception: Trustee in a voting trust may be elected director/trustee.  If NON-STOCK, trustee must be a member. (a) Majority of the directors/trustees must be residents of the Philippines. (b) Natural person (c) Of Legal Age (d) Other qualifications as may be prescribed in the by-laws of the corporation.

CUMULATIVE VOTING CUMULATIVE VOTING FOR ONE CANDIDATE A stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. Illustration: If there are 5 directors to be elected and Pedro, as shareholder, has 100 shares, Pedro can give 500 (5 x 100 shares) votes to just one candidate.

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CUMULATIVE VOTING BY DISTRIBUTION A stockholder may cumulate his shares by multiplying the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit.

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corporation, by a vote of 2/3 of the members entitled to vote  At a regular or special meeting after proper notice is given

FILLING OF VACANCIES

Illustration: In the illustration above, Pedro instead may choose to give 100 votes to candidate 1, 100 votes to candidate 2, 100 votes to candidate 3, 150 votes to candidate 4, and 50 votes to candidate 5.

VACANCY (1) BY REMOVAL; OR (2) BY EXPIRATION OF TERM; OR (3) WHEN THE REMAINING DIRECTORS DO NOT CONSTITUTE A QUORUM

 Vacancy/ies must be filled by the stockholders in a regular or special meeting called for that purpose.  A director or trustee elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office.

STRAIGHT VOTING

Every stockholder may vote such number of shares for as many persons as there are directors to be elected.

QUORUM

 There must be present, in person or by representative authorized to act by written proxy, the owners of majority of the OCS or majority of the members entitled to vote in the meeting.  Election must be by ballot if requested.  A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to use any of the methods of voting in the election of directors.  No delinquent stock shall be voted.  The candidates receiving the highest number of votes shall be declared elected.

VACANCY BY REASON OF INCREASE IN THE NUMBER OF THE DIRECTORS/TRUSTEES

Vacancy/ies must be filled by the stockholders:  in a regular or special meeting called for that purpose; or  in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting.

VACANCY BY OTHER CAUSES

Vacancy/ies may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum.

REMOVAL General Rule: Any Director or Trustee of a corporation may be removed from office, with or without cause. [Sec. 28]

COMPENSATION [SEC. 30]

General Rule: Directors are only entitled to reasonable per diems. They are not entitled to compensation as directors.

Exception: Directors who have been elected by minority stockholders exercising cumulative voting can only be removed for cause. Removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Section 24.

Exception:  When AOI, by-laws, or an advance contract provides for compensation.  Compensation other than per diems may also be granted to directors by the vote of the stockholders representing at least a majority of the OCS at a regular or special stockholders’ meeting.

Other requisites:  by a vote of the stockholders holding or representing 2/3 of the outstanding capital stock, or if the corporation be a non-stock

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The total yearly compensation of directors shall not exceed 10% of the net income before income tax of the corporation during the preceding year.

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DUTY OF DILIGENCE Directors or trustees who (i) willfully and knowingly vote for or assent to patently unlawful acts of the corporation or (ii) who are guilty of gross negligence or bad faith in directing the affairs of the corporation or (iii) acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. [Sec. 31]

COMPENSATION OF DIRECTORS AS CORPORATE OFFICERS Western Institute of Technology v. Salas (1997): The position of being chairman and ViceChairman, like that of treasurer and secretary, are not considered directorship positions but officership positions that would entitle the occupants to compensation. Likewise, the limitation placed under Sec. 30 of the Corporation Code that directors cannot receive compensation exceeding 10% of the net income of the corporation would not apply to the compensation given to such positions since it is being given in their capacity as officers of the corporation and not as board members.

Republic of the Philippines v. Sandiganbayan (First Division) et al. (2011): The conditions for the application of Section 31 of the Corporation Code require factual foundations to be first laid out in appropriate judicial proceedings. Hence, concluding that a person breached fiduciary duties as an officer and member of the Board of Directors of a corporation without competent evidence thereon would be unwarranted and unreasonable.

FIDUCIARY DUTIES AND LIABILITY RULES

DUTY OF LOYALTY  Directors and trustees should not acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees, otherwise they shall be held liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. [Sec. 31]  Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock (Sec. 34)

DUTIES Strategic Alliance Development Corp v. Radstock Securities Ltd. (2009): In this jurisdiction, the members of the board of directors have a three-fold duty: duty of obedience, duty of diligence, and duty of loyalty. Accordingly, the members of the board of directors (1) Duty of Obedience - shall direct the affairs of the corporation only in accordance with the purposes for which it was organized; (2)Duty of Diligence - shall not willfully and knowingly vote for or assent to patently unlawful acts of the corporation or act in bad faith or with gross negligence in directing the affairs of the corporation; and (3) Duty of Loyalty - shall not acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees.

DOCTRINE OF CORPORATE OPPORTUNITY Unless his act is ratified, a director shall refund to the corporation all the profits he realizes on a business opportunity which:  corporation is financially able to undertake  from its nature, is in line with corporation’s business and is of practical advantage to it; and

DUTY OF OBEDIENCE The Directors or Trustees and Officers to be elected shall perform the duties enjoined on them by law and by the by-laws of the corporation [Sec. 25]

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 one in which the corporation has an interest or a reasonable expectancy.

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forthwith express his objection in writing and file the same with the corporate secretary shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference in value [Sec. 65].

The rule shall be applied notwithstanding the fact that the director risked his own funds in the venture. [Sec. 34]

PERSONAL LIABILITIES

By embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation. Hence, the law does not permit him to seize the opportunity even if he will use his own funds in the venture. [Sundiang and Aquino]

General Rule: Price v. Innodata Phils., Inc. (2008): Members of the Board, who purport to act in good faith for and in behalf of the corporation within the lawful scope of their authority, are not liable for the consequences of their acts. When the acts are of such nature and done under those circumstances, they are attributed to the corporation alone and no personal liability is incurred.

NOTE: Differences between Section 31 and Section 34:  First, while both involve the same subject matter (business opportunity) they concern different personalities; Sec. 34 is applicable only to directors and not to officers, whereas Sec. 31 applies to directors, trustees and officers.  Second, Sec. 34 allows a ratification of a transaction by a self-dealing director by vote of stockholders representing at least 2/3 of the outstanding capital stock. [Villanueva]

The provisions on seizing corporate opportunity and disloyalty [Secs. 31 and 34] shall also apply to corporate officers. Note: Members of the BOD who are also officers are held to a more stringent liability because they are in-charge of day-to-day activities [Campos]

SOLIDARY LIABILITY FOR DAMAGES

 Willfully and knowingly voting for and assenting to patently unlawful acts of the corporation; [Sec. 31]  Gross negligence or bad faith in directing the affairs of the corporation; [Sec. 31]  Acquiring any personal or pecuniary interest in conflict of duty; [Sec. 31]  Consenting to the issuance of watered stocks, or, having knowledge thereof, failing to file objections with secretary; [Sec. 65]  Agreeing or stipulating in a contract to hold himself liable with the corporation; or  By virtue of a specific provision of law

Doctrine Of Limited Liability

Doctrine Of Immunity

Shields the corporators from corporate liability beyond their agreed contribution to the capital or shareholding in the corporation.

Protects a person acting for and in behalf of the corporation from being himself personally liable for his authorized actions

Tramat Mercantile, Inc. vs. CA, (1994), reiterated in Atrium Management Corp. v. CA, (2001): Liability of Director, Trustee or Officer (Asked in 96 and 97) Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when:  He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to

LIABILITY FOR WATERED STOCKS

 Watered Stocks – stocks issued for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value.  Any director or officer of a corporation consenting to the issuance of watered stocks or who, having knowledge thereof, does not

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

 

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the corporation, its stockholders or other persons; He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; He agrees to hold himself personally and solidarily liable with the corporation; or He is made, by a specific provision of law, to personally answer for his corporate action

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West Coast Life Ins. Co. v. Hurd (1914); Time Inc. v. Reyes (1971): Criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the corporation itself. Since the BOD is the repository of corporate powers and acts as the agent of the corporation, the directors may be held criminally liable. Ong v. CA (2003): The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes the officers or employees or other persons responsible for the offense liable to suffer the penalty of imprisonment. The reason is obvious: corporations, partnerships, associations and other juridical entities cannot be put to jail. Hence, the criminal liability falls on the human agent responsible for the violation of the Trust Receipts Law.

SPECIAL FACTS DOCTRINE Strong v. Repide (1909): Even though a director may not be under the obligation of a fiduciary nature to disclose to a shareholder his knowledge affecting the value of the shares, that duty may exist in special cases. General Rule: Majority view: Directors only owe its duty to the corporation. They owe no fiduciary duty to stockholders but they may deal with each other at fair and reasonable terms, as if they were unrelated. No duty to disclose facts known to the director or officer. [Taylor v. Wright, 1945]

INSIDE INFORMATION

 The fiduciary position of insiders1, directors, and officers prohibits them from using confidential information relating to the business of the corporation to benefit themselves or any competitor corporation in which they may have a mere substantial interest.  Since loss and prejudice to the corporation is not a requirement for liability, the corporation has a cause of action as long as there is unfair use of inside information  It is inside information if it is not generally available to others and is acquired because of the close relationship of the director or officer to the corporation

Note: Minority View (Realistic View) recognizes the directors’ obligation to the stockholders individually as well as collectively, and refuses to permit him to profit at the latter’s expense by the use of information obtained as a result of official position and duties. Exception: Special Facts Doctrine: Conceding the absence of a fiduciary relationship in the ordinary case, courts nevertheless hold that where special circumstances or facts are present which make it inequitable for the director to withhold information from the stockholder, the duty to disclose arises and concealment is fraud. [Strong v. Repide, 1909]

RESPONSIBILITY FOR CRIMES

1 “Insider” means: (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a person controlling the issuer; (c) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; (d) a government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (e) a person who learns such information by a communication from any of the foregoing insiders (§3.8, Sec Regulations Code)

Since a corporation as a person is a mere legal fiction, it cannot be proceeded against criminally because it cannot commit a crime in which personal violence or malicious intent is required.

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Exception: If contract is fraudulent or not fair and reasonable under the circumstances

CONTRACTS BY SELF-DEALING DIRECTORS WITH THE CORPORATION

IF THE INTEREST OF THE INTERLOCKING DIRECTOR IN ONE OF THE CORPORATIONS IS NOMINAL (STOCKHOLDINGS 20% OR LESS) WHILE SUBSTANTIAL IN THE OTHER, THE CONTRACT SHALL BE VALID, IF THE FOLLOWING CONDITIONS ARE MET: (1) The presence of such director or trustee in the board meeting in which the contract was approved was NOT necessary to constitute a quorum for such meeting (2) That the vote of such director or trustee was not necessary for the approval of the contract (3) That the contract is fair and reasonable under the circumstances.

General Rule: A contract of the corporation with one or more of its directors or trustees is VOIDABLE, at the option of such corporation. [Sec. 32] Exception: Such contract is VALID if all of the following conditions are present:  That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting;  That the vote of such director or trustee was not necessary for the approval of the contract;  That the contract is fair and reasonable under the circumstances; and  That in case of an officer, the contract has been previously authorized by the board of directors.

Where (1) and (2) are absent, the contract can be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members in a meeting called for the purpose voted to ratify the contract, provided that:  Full disclosure of the adverse interest of the directors/trustees involved is made on such meeting;  The contract is fair and reasonable under the circumstances.

Ratification In case of absence of the first two conditions above, contract may be ratified if:  Stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members in a meeting called for the purpose voted to ratify the contract.  Full disclosure of the adverse interest of the directors or trustees involved is made at such meeting.  Contract is fair and reasonable under the circumstances

MANAGEMENT CONTRACTS [SEC 44] See: Corporate Powers above.

EXECUTIVE COMMITTEE CREATION

 The by-laws of a corporation may create an executive committee, composed of not less than three members of the board, to be appointed by the board.  Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board [Sec. 35].

BETWEEN CORPORATIONS WITH INTERLOCKING DIRECTORS IF THE INTERESTS OF THE INTERLOCKING DIRECTOR IN THE CORPORATIONS ARE BOTH SUBSTANTIAL (STOCKHOLDINGS EXCEED 20% OF OUTSTANDING CAPITAL STOCK). General Rule: A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone. [Sec. 32]

LIMITATION ON ITS POWERS

CANNOT act on the following:  Matters needing stockholder approval [Sec. 35];

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 Filling up of board vacancies;  Amendment, repeal or adoption of by-laws [Sec. 35];  Amendment or repeal of any resolution of the Board which by its express terms is not amendable or repealable [Sec. 35];  Cash dividend distribution [Sec. 35]; and  Acts which would render the BOD powerless and free from all responsibilities imposed on it by law [Campos]

MERCANTILE LAW

directors of private corporations is a reality, in light of Republic Act No. 8792. The Securities and Exchange Commission issued SEC Memorandum Circular No. 15, on November 30, 2001, providing the guidelines to be complied with in relation to such conferences. WHEN AND WHERE When? [Sec.53]  Regular meetings of directors or trustees shall be held monthly, unless the by-laws provide otherwise.  Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the by-laws.

Filipinas Port Services Inc. v. Go (2007): Under Section 35 of the Corporation Code, the creation of an executive committee must be provided for in the by-laws of the corporation. Unfortunately, the by-laws of the corporation in this case are silent as to the creation by its BOD of an executive committee.

Where? [Sec. 53] Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise.

Notwithstanding the silence of the by-laws on the matter, the SC did not rule that the BOD’s creation of the executive committee is illegal or unlawful. (a) One reason is the absence of a showing as to the true nature and functions of said executive committee considering that the "executive committee," referred to in Section 35 of the Corporation Code which is as powerful as the BOD and in effect acting for the board itself, should be distinguished from other committees which are within the competency of the board to create at anytime and whose actions require ratification and confirmation by the board. (b) Another reason is that the BOD has the power to create positions not provided for in the by-laws since the board is the corporation’s governing body.

NOTICE  Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the by-laws.  A director or trustee may waive this requirement, either expressly or impliedly

WHO PRESIDES

The president presides, unless the by-laws provide otherwise. [Sec. 54]

QUORUM

General Rule: Majority of the number of directors or trustees as fixed in the articles of incorporation. [Sec. 25]

MEETINGS

EXCEPTIONS (1) Unless the articles of incorporation or the bylaws provide for a GREATER majority, or (2) In case of election of officers where a vote of a majority of all the members of the board is needed.

REGULAR OR SPECIAL

WHO MAY ATTEND? The members of the Board themselves; directors in Board meetings cannot be represented or voted by proxies. Expertravel & Tours, Inc. v. CA, (May 26, 2005): In the Philippines, teleconferencing and videoconferencing of members of board of

Tan v. Sycip (2006): Whether or not "dead members" are entitled to exercise their voting rights (through their executor or administrator),

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depends on the articles of incorporation or bylaws. The quorum in a members’ meeting is to be reckoned as the actual number of members of the corporation. What happens in the event of the death of one of them?  In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor.  On the other hand, membership in and all rights arising from a non-stock corporation are personal and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise. In other words, the determination of whether or not “dead members” are entitled to exercise their voting rights (through their executor or administrator), depends on the AOI or bylaws.

   

MERCANTILE LAW

- Proportionate participation in the distribution of assets in liquidation [Sec. 122] - Right to transfer of stocks in corporate books [Sec. 63] - Pre-emptive right [Sec. 39] Right to inspect books and records [Sec. 74] Right to be furnished with the most recent financial statements/reports [Sec. 75] Right to recover stocks unlawfully sold for delinquent payment of subscription [Sec. 69] Right to file individual suit, representative suit and derivative suits

DOCTRINE OF EQUALITY OF SHARES CIR v. CA, CTA, and A. Soriano Corporation (1999): All stocks issued by the corporation are presumed equal with the same privileges and liabilities, provided that the Articles of Incorporation is silent on such differences. Doctrine of Equality of Shares provides that where the Articles of Incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities. (Sundiang and Aquino)

RULE ON ABSTENTION A vote of abstention is considered to be a vote in itself. Abstentions will not be counted towards the affirmative and such refusal to vote does not indicate acquiescence in the action of those who vote.

The default rule is that all stockholders have equal right and obligations, expressed in the last paragraph of Section 6 of the Corporation Code which provides, “each share shall be equal in all respects to every other share.” [Villanueva]

Stockholders and Members

Note:  However, when preferences or restrictions are made to apply to a class of shares, then such preferences on restrictions shall exist and be valid only when “provided in the articles of incorporation and stated in the certificate of stock.” [Villanueva]  Section 6 of the Corporation Code also contains a “Board-enabling” clause that although the default rule is that all shareholders have equal rights and obligations, nevertheless, when authorized by the articles of incorporation, the Board of Directors, may fix the terms and conditions of preferred shares of stock or any series thereof, or to classify its shares for the purpose of

RIGHTS OF A STOCKHOLDER AND MEMBERS

 Direct or indirect participation in management [Sec. 6]  Voting rights [Sec. 6]  Right to remove directors [Sec. 28]  Proprietary rights - Right to dividends [Secs. 43 and 71] - Appraisal right [Sec. 81] - Right to issuance of stock certificate for fully paid shares [Sec. 64]

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insuring compliance with constitutional or legal requirements; but such terms and conditions shall be effective upon filing of a certificate thereof with the SEC. Thus, a preference or restriction on shares may be valid and effective only if the same has formally been registered with the SEC and thereby becomes public records binding on the public. [Villanueva]

MERCANTILE LAW

Requisites for a Valid and Enforceable Proxy: (a) It must be in writing (b) Signed by the stockholder or member of record; and (c) Filed with the corporation before the scheduled meeting with the Corporate Secretary Procedural Matters Relating to Proxies: (a) “Proxy solicitation” involves the securing and submission of proxies, while “proxy validation” concerns the validation of such secured and submitted proxies; (b) The SEC’s power to pass upon the validity of proxies in relation to election controversies has effectively been withdrawn, tied as it is to its abrogated quasi-judicial powers, and has been transferred to the RTC Special Commercial Courts pursuant to the terms of Section 5.2 of the Securities Regulation Code; (c) Nevertheless, although an intra-corporate controversy may animate a disgruntled shareholder to complain to the SEC a corporation’s violations of SEC rules and regulations, but that motive alone should not be sufficient to deprive the SEC of its investigatory and regulatory powers, especially so since such powers are exercisable on a motu proprio basis.

Nature of the Rights of Members  The eleemosynary nature of every non-stock corporation defines the characteristic of membership therein as being essentially personal in character and therefore essentially non-transferable in nature.  Section 89 of the Corporation Code specifically provides that in a non-stock corporation, the right of members of any class or classes to vote “may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws.” SEC Opinion, 4 September 1995: The SEC has opined that the rule in Section 6 allowing nonvoting shares to vote on specified fundamental matters does not apply to non-voting members of a non-stock corporation; that insofar as members of a non-stock corporation, the applicable provision is Section 89, which specifically provides that members may be denied entirely their voting rights in the articles of incorporation or by-laws of the corporation.

GSIS v. CA (2009): The fact that the jurisdiction of the RTC Special Commercial Courts is confined to the voting on election of officers, and not all matter which may be voted upon by stockholders, elucidates that the power of the SEC to regulate proxies remains extant and could very well be exercised when stockholders vote on matters other than the election of directors.

PARTICIPATION IN MANAGEMENT PROXY

 Stockholders and members may vote in person or by proxy in all meetings of stockholders or members [Sec. 58].  The right to issue a proxy is vested with public interest when it comes to stock corporations; although it may be regulated under the bylaws, it cannot be denied, since it is an aspect of ownership interest of stockholders.  However, the right of members to vote by proxy may be denied under the articles of incorporation or by-laws of a non-stock corporation [Sec. 89]

VOTING TRUST

 An arrangement created by one or more stockholders for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time [Sec. 59].  Under a voting trust arrangement, a stockholder of a stock corporation parts with the naked or legal title, including the power to

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vote, of the shares and only retains the beneficial ownership of the stock. A voting trustee is a share owner vested with colorable and naked title of the shares covered for the primary purpose of voting upon stocks that he does not own.  A voting trust agreement shall be ineffective and unreasonable unless: (a) It is in writing and notarized; (b) Specify the terms and conditions thereof; and (c) A certified copy of such agreement shall be filed with the corporation and with the SEC. Proxy Principal–agent

CASES WHEN STOCKHOLDERS’ ACTION IS REQUIRED Tan v. Sycip (2006): Under Section 6 of the Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquent under Section 67 of the Code. In non-stock corporations, the voting rights attach to membership. Members vote as persons, in accordance with the law and the bylaws of the corporation. Each member shall be entitled to one vote unless so limited, broadened, or denied in the articles of incorporation or by-laws. When the principle for determining the quorum for stock corporations is applied by analogy to non-stock corporations, only those who are actual members with voting rights should be counted.

Trustee Trustee-beneficiary

Proxy cannot exceed The only limit to delegated authority. authority is that the act must be for the benefit of trustee. (fiduciary obligation) Must be in writing

BY A MAJORITY VOTE (a) Power to enter contracts [Sec. 44]

Must be in writing and notarized

Transfer of legal title to trustee.

Proxy exercises voting rights only for a specific meeting (unless otherwise provided)

Trustee exercises absolute voting rights continuously, subject only to fiduciary duty.

Proxy cannot director

management

Exceptions:  Where a stockholder/s representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or  Where a majority of the members of the managing corporation’s BOD also constitute a majority of the managed corporation’s BOD

be Trustee can be director because he holds legal title over the shares

Revocable at will in any Irrevocable, as long as manner, EXCEPT if no misconduct or coupled with an fraud. interest. Max of 5 yrs at a time

into

General Rule: Requires approval by majority of the BOD/BOT and approval by stockholders owning at least the majority of the outstanding capital stock/majority of members of both the managing and the managed corporation

Copy must be filed with Copy must be filed with the corporation. SEC and the corporation. No transfer.

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Requires at least 2/3 votes of the outstanding capital stock/membership of the managed corporation.

Max of 5 yrs at a time (unless the voting trust is specifically required as a condition in a loan agreement)

BUT only majority vote is required for the managing corporation.

SEC can pass on validity

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(b) Amendments to by-laws [Sec. 48]  Requires approval by majority of the BOD/BOT and approval by stockholders owning at least the majority of the outstanding capital stock/majority of members  Includes all stockholders with or without voting rights

MERCANTILE LAW

Amendment of AOI of close corporations [Sec 103] Amendment to the AOI which seeks to delete or remove any provision required to be contained in the AOI of Close Corporations or to reduce a quorum or voting requirement stated in said AOI requires the affirmative vote of at least 2/3 of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the AOI at a meeting duly called.

(c) Revocation of delegation to the BOD of the power to amend or repeal or adopt bylaws [Sec. 48] Requires approval by stockholders owning at least the majority of the outstanding capital stock/majority of members

(b) Delegating the power to amend or repeal by-laws or adopt new by-laws [Sec. 48]  Delegation to the BOD/BOT of the power to amend or repeal by-laws or adopt new bylaws requires approval by at least two-thirds (2/3) of the outstanding capital stock/membership.  Revocation of the delegation requires only majority vote of the outstanding capital stock/membership.

(d) Calling a meeting to remove directors

[Sec. 28]

Meeting for the removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock/majority of members

(c) Extending/shortening corporate term

[Sec. 37]

(e) Granting compensation other than per diems to directors [Sec. 30] Compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock

 Requires approval by a majority vote of the BOD/BOT and approval by at least two-thirds (2/3) of the outstanding capital stock/membership.  Includes all stockholders with or without voting rights

(f) Consideration for no-par shares [Sec. 62] When the AOI or the BOD does not provide for the value of no-par shares, the value of such shares shall be determined by the stockholders representing at least a majority of the outstanding capital stock

(d) Increasing/decreasing capital stock [Sec.

38]

 Requires approval by a majority vote of the BOD and approval by at least two-thirds (2/3) of the outstanding capital stock.  Includes all stockholders with or without voting rights

BY A TWO-THIRDS VOTE (a) Amendment of Articles of Incorporation

(e) Incurring, creating, increasing bonded indebtedness [Sec. 38]  Requires approval by a majority vote of the BOD and approval by at least two-thirds (2/3) of the outstanding capital stock.  Includes all stockholders with or without voting rights

[Sec. 16]

 Amendment of the AOI may be made by a majority vote of the BOD/BOT and the vote or written assent of the stockholders representing at least two-thirds 2/3 of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders.  Includes all stockholders with or without voting rights

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(f) Issuance of shares not subject to preemptive right [Sec. 39] Shares issued in good faith in exchange for property or previously incurred indebtedness with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock are not subject to pre-emptive rights.

MERCANTILE LAW

(l) Ratifying contracts with respect to dealings with directors/ trustees [Sec. 32] A contract of the corporation with one or more of its directors is voidable, at the option of such corporation, unless all the following conditions are present:  The director’s presence in the BOD meeting in which the contract was approved was not necessary to constitute a quorum  The vote of such director was not necessary for the approval of the contract  The contract is fair and reasonable under the circumstances  In case of an officer, the contract has been previously authorized by the BOD.

(g) Sale/disposition of all or substantially all of corporate assets (Sec. 40)  Requires approval by a majority vote of the BOD/BOT and approval by at least two-thirds (2/3) of the outstanding capital stock/membership.  Includes all stockholders with or without voting rights  Note: In non-stock corporations where there are NO members with voting rights, the vote of at least the majority of the BOT will be sufficient authorization for any sale or disposition of all or substantially all of corporate assets. (Sec. 40)

Where any of the first two conditions is absent, in the case of a contract with a director, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock provided that the contract is fair and reasonable under the circumstances.

(h) Investment of funds in another business

(m) Ratifying acts of disloyalty of a director

[Sec. 42]

[Sec. 34]

 Requires approval by a majority vote of the BOD/BOT and approval by at least two-thirds (2/3) of the outstanding capital stock/membership.  Includes all stockholders with or without voting rights

General Rule: Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits, he must account to the corporation for all such profits by refunding it.

(i) Dividend declaration [Sec. 43] No stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock.

Exception: His act may be ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock. (n) Stockholders’ approval of the plan of merger or consolidation (Sec. 77)  Requires approval by majority of each of the BOD/BOT of the constituent corporations of the plan of merger or consolidation and approval by at least two-thirds (2/3) of the outstanding capital stock/membership of each corporation at separate corporate meetings duly called.  Amendments to the plan of merger or consolidation also requires approval by majority vote of each of the BOD and twothirds (2/3) vote of the outstanding capital

(j) Power to enter into management contracts

[Sec. 44]

Please see discussion under By a Majority Vote (k) Removal of directors or trustees [Sec. 28] Any director or trustee may be removed from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock/membership.

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stock/membership of each corporation voting separately.  Includes all stockholders with or without voting rights

MERCANTILE LAW

PROPRIETARY RIGHTS RIGHT TO DIVIDENDS

General Rule: The right to dividends vests upon lawful declaration by the BOD. From that time, dividends become a debt owing to the SH. No revocation can be made.

(o) Distribution of assets in non-stock corporations [Sec. 96] The BOT shall, by majority vote, adopt a resolution recommending a plan of distribution which shall be approved by at least two-thirds (2/3) of the members with voting rights.

Exceptions:  Dividends are revocable if NOT yet announced or communicated to the stockholders.  Stock dividends, even if already declared, may be revoked prior to actual issuance since these are not distributions but merely representations of changes in the capital structure.

(p) Incorporation of a religious society [Sec.

116]

Any religious society or religious order, or any diocese, synod, or district organization of any religious denomination, sect or church, unless forbidden by the constitution, rules, regulations, or discipline of the religious denomination, sect or church of which it is a part, or by competent authority, may, upon written consent and/or by an affirmative vote at a meeting called for the purpose of at least two-thirds (2/3) of its membership, incorporate for the administration of its temporalities or for the management of its affairs, properties and estate.

Note: Right to dividends vests upon declaration so whoever owns the stock at such time also owns the dividends. Subsequent transfer of stock would not carry with it right to dividends UNLESS agreed upon by the parties.

RIGHT OF APPRAISAL

Right to withdraw from the corporation and demand payment of the fair value of the shares after dissenting from certain corporate acts involving fundamental changes in corporate structure [Sec. 81]. The amount paid to the stockholder is the fair value of his shares as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of the corporate action [Sec. 82].

(q) Voluntary dissolution of a corporation

[Sec. 118-119]

Requires a resolution adopted by a majority vote of the BOD/BOT, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least two-thirds (2/3) of the outstanding capital stock/membership at a meeting to be held upon call for such purpose.

INSTANCES OF APPRAISAL RIGHT  Extension or reduction or corporate term [Sec. 81]  Amendment to AOI which involves change in the rights of stockholders, authorize preferences superior to those stockholders, or restrict the right of any stockholder [Sec. 81]  Investment of corporate funds in another business or purpose [Sec. 42]  Sale or disposal of all or substantially all assets of the corporation [Sec. 81]  Merger or consolidation [Sec. 81]

BY CUMULATIVE VOTING Election of Directors or Trustees [Sec. 24] - A stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, That the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected.

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RECORDS/BOOKS TO BE KEPT [SEC. 74]  Books that record all business transactions of the corporation which shall include contract, memoranda, journals, ledgers, etc;  Minute book for meetings of the stockholders/members;  Minute book for meetings of the board/trustees;  Stock and transfer book

REQUIREMENTS FOR EXERCISE OF APPRAISAL RIGHT [SECS. 82, 86]  Stockholder must have voted against the corporate act.  Stockholder must make a written demand on the corporation within 30 days after the vote was taken for payment of the fair value of his shares.  Stockholder must submit his certificates of stock to the corporation for notation within ten (10) days after demand for payment. Otherwise, right to appraisal may be terminated at the option of corporation.

Stock transfer agent - One engaged principally in the business of registering transfers of stocks in behalf of a stock corporation (licensed by the SEC).

EFFECT OF DEMAND [SEC. 83]  ALL rights accruing to such shares, including voting and dividend rights, shall be suspended  EXCEPT the right of such stockholder to receive payment of the fair value thereof  Immediate RESTORATION of voting and dividend rights if the dissenting stockholder is not paid the value of his shares within 30 days after the award.

The corporate secretary is the one duly authorized to make entries in the stock and transfer book. Torres et al v. CA (1997): It is the corporate secretary's duty and obligation to register valid transfers of stocks and if said corporate officer refuses to comply, the transferor-stockholder may rightfully bring suit to compel performance.

EXTINGUISHMENT OF APPRAISAL RIGHT

[SEC. 84]

FINANCIAL STATEMENTS [SEC. 75]  Within 10 days from written request, the corporation shall furnish its most recent financial statement (balance sheet and profit or loss statement as of last taxable year)  At a regular meeting, the Board shall present a financial report of the operations of the corporation for the preceding year, which shall include financial statements duly signed and certified by an independent CPA.

 Withdrawal of demand by the stockholder WITH CONSENT of the corporation  Abandonment of the proposed action  Disapproval by SEC of the proposed action

RIGHT TO INSPECT BASIS OF RIGHT As the beneficial owners of the business, the stockholders have the right to know the financial condition and management of corporate affairs.

Exception: If the paid-up capital is less than P50,000 – the financial statements may be certified under oath by the treasurer or any responsible officer of the corporation (instead of an independent CPA).

Gokongwei Jr. v. SEC (1979): A stockholder’s right of inspection is based on his ownership of the assets and property of the corporation. Therefore, it is an incident of ownership of the corporate property, whether this ownership or interest is termed an equitable ownership, a beneficial ownership, or quasi-ownership. Such right is predicated upon the necessity of selfprotection.

REQUIREMENTS FOR THE EXERCISE OF THE RIGHT OF INSPECTION [SEC. 74] (1) It must be exercised at reasonable hours on business days and in the place where the corporation keeps all its records (i.e., principal office).

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(2) The stockholder has not improperly used any information he secured through any previous examination. (3) Demand is made in good faith or for a legitimate purpose. If the corporation or its officers contest such purpose or contend that there is evil motive behind the inspection, the burden of proof is with the corporation or such officer to show the same.

MERCANTILE LAW

cannot, without an order of a court, be permitted to take books from the office of the corporation. However, a director or stockholder does not have any absolute right to secure certified copies of the minutes of the corporation until these minutes have been written up and approved by the directors. Africa v. PCGG (1992): A stockholder of a sequestered company has the right to inspect and/or examine the records of the corporation pursuant to Sec. 74 of the Corporation Code.

Gokongwei v. SEC (1979): TEST to determine whether the purpose is legitimate – A legitimate purpose is one which is germane to the interests of the stockholder as such and not contrary to the interests of the corporation

REMEDIES WHEN INSPECTION IS REFUSED  Mandamus  Injunction  Action for damages  File an action under Sec. 144 to impose a penal offense by fine and/or imprisonment

Gonzales v. PNB (1983): Among the changes introduced in the new Code with respect to the right of inspection granted to a stockholder are the following: (1) The records must be kept at the principal office of the corporation; (2) The inspection must be made on business days; (3) The stockholder may demand a copy of the excerpts of the records or minutes; (4) The refusal to allow such inspection shall subject the erring officer or agent of the corporation to civil and criminal liabilities. However, while seemingly enlarging the right of inspection, the new Code has prescribed limitations to the same. It is now expressly required as a condition for such examination that the one requesting it must not have been guilty of using improperly any information through a prior examination, and that the person asking for such examination must be "acting in good faith and for a legitimate purpose in making his demand."

PRE-EMPTIVE RIGHT

DEFINITION AND DISTINGUISHED FROM RIGHT OF FIRST REFUSAL  Pre-emptive right is an option privilege of an existing stockholder to subscribe to a proportionate part of shares subsequently issued by the corporation before the same can be disposed of in favor of others; this right includes all issues and disposition of shares of any class. It is a common law right and may be exercised by stockholders even without legal provision. On the other hand, a right of first refusal arises only by virtue of contract stipulations, by which the right is strictly construed against the right of person to dispose or deal with their property.  Stockholders of a corporation shall enjoy preemptive right to subscribe to ALL ISSUES OR DISPOSITIONS OF SHARES OF ANY CLASS, in proportion to their respective shareholdings. The purpose is to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus.

Veraguth v. Isabela Sugar (1932): Directors of a corporation have the unqualified right to inspect the books and records of the corporation at all reasonable times. The right of inspection is not to be denied on the ground that the director or shareholder is on unfriendly terms with the officers of the corporation whose records are sought to be inspected. A director or stockholder can make copies, abstracts, and memoranda of documents, books, and papers as an incident to the right of inspection, but

Note: The broad phrase “all issues or disposition of shares of any class” is construed to include not only new shares issued in pursuance of an increase in capital stock or from the unissued shares which form part of the ACS, but also

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covers “treasury shares.” Treasury shares would come under the term “disposition.” Likewise considering that it is not included among the exceptions enumerated therein, where preemptive right shall not extend, the intention is to include it in its application. [SEC Opinion, 14 January 1993].

MERCANTILE LAW

WAIVER/ DENIAL OF PREEMPTIVE RIGHT  Allowed by the Code provided that it is made in the AOI - Waiver made through AOI – would bind present and subsequent SH - 2/3 vote of the outstanding capital stock is necessary before waiver is binding - Result of Non-placement of waiver clause in AOI: waiver shall not bind future stockholders but only those who agreed to it  The SH must be given reasonable time within which to exercise their pre-emptive rights. Upon expiration of such period, any SH who did not exercise such will be deemed to have waived it. This is necessary so as to not hinder future financing plans of the corporation. Some new investors may be willing to invest only if all the new shares will be issued to them (Campos).

A pre-emptive right is a right claimed against the corporation on unissued shares of its capital stock, and likewise on treasury shares held by the corporation; while the right of first refusal is a right exercisable against another stockholder on his shares of stock. [Villanueva] Basis of Preemptive Right: to preserve the existing proportional rights of the stockholders [Campos] LIMITATIONS TO EXERCISE OF PREEMPTIVE RIGHT [SEC. 39]  Such pre-emptive right shall NOT extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public;  It shall also NOT extend to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt  It shall not take effect if denied in the AOI or an amendment thereto.  If one shareholder does not want to exercise his pre-emptive right, the other shareholders are not entitled to purchase the corresponding shares of the shareholder who declined. But if nobody purchased the same and later on the board re-issued the shares, the pre-emptive right applies. [Sundiang and Aquino]

RIGHT TO VOTE

 Non-voting shares are not entitled to vote except as provided for in the last paragraph of Sec. 6.  Preferred or redeemable shares may be deprived of the right to vote  Fractional shares of stock cannot be voted  Treasury shares have no voting rights as long as they remain in the treasury.  No delinquent stock shall be voted [Sec. 71]  A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the corporation.

RIGHT OF FIRST REFUSAL

The right of first refusal provides that a stockholder who may wish to sell or assign his shares must first offer the shares to the corporation or to the other existing stockholders under terms and conditions which are reasonable; and that only when the corporation or the other stockholders do not or fail to exercise their option, is the offering stockholder at liberty to dispose of his shares to third parties.

REMEDIES IN CASE OF UNWARRANTED DENIAL  Injunction  Mandamus  The suit should be individual and not derivative because the wrong done is to the stockholders individually  SEC can cancel shares if the third party is not innocent

Lambert v. Fox (1914): An agreement entered into between the two majority stockholders of a corporation whereby they mutually agreed not to sell, transfer, or otherwise dispose of any part

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of their shareholdings till after one year from the date of the agreement.

MERCANTILE LAW

with particularity in the complaint, to exhaust all remedies available under the Articles of Incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires. (3) That there is no appraisal right available for the act(s) complained of; and (4) That the suit is not a nuisance or harassment suit. [Rule 8, Interim Rules of Procedure for Intra-Corporate Controversies]

PCGG v. SEC, unreported (1988): The right of first refusal is primarily an attribute of ownership, and consequently can be effected only through a contractual commitment by the owner of the shares; consequently, the waiver of a right of first refusal when duly constituted can be effected only by the registered owner.

Requisites of a Derivative Suit according to Jurisprudence SMC v. Kahn, 1989: (a) the party bringing the suit should be a shareholder as of the time of the act or transaction complained of, the number of his shares not being material; (b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the appropriate relief but the latter has failed or refused to heed his plea; and (c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused to the corporation and not to the particular stockholder bringing the suit. [Lisam Enterprises, Inc., represented

REMEDIAL RIGHTS INDIVIDUAL SUIT A suit brought by the shareholder in his own name against the corporation when a wrong is directly inflicted against him.

REPRESENTATIVE SUIT

A suit brought by the stockholder in behalf of himself and all other stockholders similarly situated when a wrong is committed against a group of stockholders.

DERIVATIVE SUIT Chua v. CA (2004): It is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit, and the relief which is granted is a judgment against a third person in favor of the corporation.

by Lolita A. Soriano and Lolita A. Soriano v. Banco de Oro Unibank, Inc., et al., 2012] Note: The “wrong” contemplated in a derivative suit is one in which the injury alleged be indirect as far as the stockholders are concerned and direct only insofar as the corporation is concerned. [De Leon]

It is a suit brought by one or more stockholders/members in the name and on behalf of the corporation to redress wrongs committed against it, or protect/vindicate corporate rights whenever the officials of the corporation refuse to sue, or the ones to be sued, or has control of the corporation. [Sundiang and Aquino]

Gochan v. Young (2001): BUT the personal injury suffered by the stockholder cannot disqualify him from filing a derivative suit in behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring corporate officers.

Suits of stockholders based on wrongful or fraudulent acts of directors or other persons. Requisites of Derivative Actions (1) That the person instituting the action be a stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed; (2) That the stockholder or member exerted all reasonable efforts, and alleges the same

Requisites based on jurisprudence (1) Evangelista vs. Santos (1950); SMC v. Kahn (1989): The cause of action actually devolves on the corporation, the wrong or harm having been, or being caused to it and not the shareholder filing the suit.

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(2) Symaco Trading Corp. v. Santos (2005): The reliefs sought pertain to the corporation.

contingency) and indivisible (as to the amount and transferability — [Fua Cun v. Summers, 1923]. Hence, if the subscriber paid 20% of his subscription, he is not entitled to the issuance of certificates corresponding to 20% of the shares.

Recent rulings on the matter Reyes v. RTC of Makati (2008): Status of heirs as co-owners of shares before partition of estate does not make them shareholders until there is compliance with Sec. 63 on the manner of transferring shares, thus the heirs are not automatically registered shareholders of the corporation.

China Banking Corp. v. CA (1997): Unpaid claim refers to any unpaid subscription and not to any indebtedness which a subscriber may owe the corporation rising from any other transaction.

LIABILITY TO THE CORPORATION FOR INTEREST ON UNPAID SUBSCRIPTION IF SO REQUIRED BY THE BY-LAWS [SEC. 66]

Yu v. Yukayguan (2009): Stockholder may commence a derivative suit “for mismanagement, waste or dissipation of corporate assets because of a special injury to him for which he is otherwise without redress. In effect, the suit is an action for specific performance of an obligation owed by the corporation to the stockholders to assist its right of action when the corporation is put on default by the wrongful refusal of the directors or management to make suitable measures for its protection.”

General Rule: Subscribers for stock are NOT liable to pay interest on his unpaid subscription Exception: If so required in the by-laws at the rate fixed in the by-laws. If no rate is fixed in the by-laws, such rate shall be deemed to be the legal rate [Sec. 66] Notes:  Transfer for consideration of treasury shares is a sale (or disposition) by the corporation (not subscription). A transfer of previously issued shares by a stockholder to a third person is a sale (or disposition). Transfer of unissued shares is subscription.  Shareholders are not creditors of the corporation with respect to their shareholdings thereto and the principle of compensation or set-off has no application.  Subscription contract is NOT required to be in writing.

Bitong v. CA (1998): The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the BOD that exercises its corporate powers and not in the president or officer thereof. But where corporate directors are guilty of a breach of trust, not of mere error of judgment or abuse of discretion, and intra-corporate remedy is futile or useless, a SH may institute a derivative suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders.

LIABILITY FOR WATERED STOCKS

[SEC. 65]

Jurisdiction over derivative suits lies with the RTC [Sec. 5.2, Securities Regulation Code]

DEFINITION These are shares issued as fully paid when in truth no consideration is paid, or the consideration received is known to be less than the par value or issued value of the shares. (Sec. 65)

OBLIGATION OF A STOCKHOLDER LIABILITY TO THE CORPORATION FOR UNPAID SUBSCRIPTION [SEC. 67]

A subscription contract is unconditional (i.e., obligation to pay is not be subject to any

MERCANTILE LAW

These include the following:  Issued without consideration (bonus share)

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 Issued as fully paid when the corporation has received less sum of money than its par or issued value (discounted share)  Issued for consideration other than actual cash (i.e., property or services), the fair valuation of which is less than its par or issued value  Issue stock dividend when there are no sufficient retained earnings or surplus profit to justify it.

MERCANTILE LAW

LIABILITY FOR ASSUMING TO ACT AS A CORPORATION KNOWING IT TO BE WITHOUT AUTHORITY

 All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof.  When any such ostensible corporation is sued on any transaction entered or on any tort committed by it as a corporation, it shall not be allowed to use as a defense its lack of corporate personality.  One who assumes an obligation to an ostensible corporation cannot resist performance thereof on the ground that there was in fact no corporation [Sec. 21].

Note: Subsequent increase in the value of the property used in paying the stock does not do away with the watered stocks. Subsequent increase in the value of the property used in paying the stock does not cure the defect in issuance. The existence of watered stocks is determined at the time of issuance of the stock. LIABILITY OF DIRECTORS OR OFFICERS Any director or officer of a corporation consenting to the issuance of watered stocks or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary shall be SOLIDARILY liable with the stockholder concerned to the corporation and its creditors for the difference in value [Sec. 65].

MEETINGS General Rule: Stockholders’ or members’ approval is expressed in a meeting duly called and held for the purpose. Exception: In case of amendment of AOI, approval may be expressed by referendum or written assent of the stockholders or members [Sec. 16]

LIABILITY FOR DIVIDENDS UNLAWFULLY PAID

Who May Attend and Vote?  Stockholders, either in person or by proxy  Pledgors or mortgagors [Sec. 55]  Pledgee or mortgagee, IF expressly given such right by the pledgor or mortgagor in writing which is recorded on the corporate books [Sec. 55]  Executors, administrators, receivers, and other legal representatives duly appointed by the court, without need of any written proxy [Sec. 55]  ALL joint owners of stocks, or any one of them with the consent of ALL the co-owners, unless there is a written proxy, signed by all the co-owners [Sec. 56]  Any one of the joint owners of shares owned in an "and/or" capacity or a proxy thereof [Sec. 56]

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation [Sec. 31]. Violations of any of the provisions of the Corporation Code not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court [Sec. 144].

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Exception: The Code or the by-laws provide otherwise

REGULAR OR SPECIAL WHEN AND WHERE

Where quorum is present at the start of a lawful meeting, stockholders present cannot without justifiable cause break the quorum by walking out from said meeting so as to defeat the validity of any act proposed and approved by the majority. (However, stockholders can break the quorum for justifiable causes.) [Johnston vs. Johnston, 1965 CA decision]

When? [Sec. 50] Regular meetings of stockholders or members shall be held annually on a date fixed in the bylaws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees. Where?  Stock: City or municipality where the principal office of the corporation is located, or, if practicable, in the principal office of the corporation: Provided, Metro Manila shall be considered a city or municipality. [Sec. 51]  Non-stock: Any place even outside the place where the principal office is located, within the Philippines [Sec. 93]

MINUTES OF THE MEETINGS

A record of all the minutes of all meetings of stockholders or members, or of the board of directors or trustees shall be kept and preserved at the principal office of every corporation. Contents:  time and place of holding the meeting;  how the meeting was authorized;  the notice given;  whether the meeting was regular or special, if special its object;  those present and absent; and  every act done or ordered done at the meeting. Upon demand by any director/trustee or SH/member, the following shall also be noted in the minutes:  the time when any director, trustee, stockholder or member entered or left the meeting;  the yeas and nays on any motion or proposition;  the protest of any director/trustee or stockholder/member on any action or proposed action.

NOTICE [Sec. 50]  Regular Meeting—written notice sent to all SH or members at least 2 weeks prior to the meeting, unless a different period is required by the by-laws  Special Meeting—written notice sent at least 1 week prior to the meeting, unless otherwise provided in the by-laws.  Subject to waiver, expressly or impliedly (i.e., attendance despite no notice) Effect of Failure to Give Notice: Failure to give notice would render a meeting VOIDABLE at the instance of an absent stockholder, who was not notified of the meeting [Board v. Tan, 1959].

WHO CALLS THE MEETINGS

 The president, unless the by-laws provide otherwise. [Sec. 54]  Any petitioning stockholder or member upon order of the SEC when there is no person authorized to call a meeting. Such petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have chosen one of them as presiding officer. [Sec. 50]

Notes: The minutes of any meetings shall be open to inspection by any director/trustee or stockholder/member at reasonable hours on business days. The director/trustee or stockholder/member may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.

QUORUM

General Rule: Stockholders representing majority of the OCS or majority of the members

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Any officer or agent of the corporation refusing to allow the examination and copying of the minutes shall be: (1) liable to the director/trustee or stockholder/ member; and (2) guilty of an offense punishable under Sec. 144 [Sec. 74]

MERCANTILE LAW

STATUS AS SHAREHOLDER One may become a shareholder in a corporation in either of two ways: (1) By entering into a SUBSCRIPTION CONTRACT with an existing or still to be formed corporation (he becomes a stockholder upon acceptance of the corporation of his offer to subscribe whether the consideration is fully paid or not).  Once a subscription contract is perfected, the stockholder becomes a debtor to the corporation and may be liable to pay any unpaid portion thereof upon call by the board of directors. (2) By acquisition of already issued shares through: (a) purchase of TREASURY SHARES from the corporation (b) acquisition of shares from existing shareholders by SALE OR ANY OTHER CONTRACT [Sundiang and Aquino]

HOWEVER, the officer of agent may use as a defense that: (1) the person demanding examination or copy thereof made improper use of any information secured through any prior examination of the records or minutes of such corporation or of any other corporation thereby; (2) the person demanding examination or copy acts in bad faith or has no legitimate purpose in making his demand.

Capital Structure

Notes: Transfer of unissued shares = SUBSCRIPTION

SUBSCRIPTION AGREEMENTS Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription contract (Sec. 60).

Transfer of already issued shares = NOT SUBSCRIPTION; can either be:  SALE/DISPOSITION BY CORPORATION of treasury shares  SALE/DISPOSITION BY STOCKHOLDER TO A THIRD PERSON

CHARACTERISTICS

A subscription is a contract for the acquisition of unissued stock of a corporation whether existing or still to be formed, and is in effect the contribution or promised contribution of a person to the capital of a corporation (Campos).

TYPES OF SUBSCRIPTION CONTRACTS PRE-INCORPORATION SUBSCRIPTION [SEC. 61] It is a subscription for shares of stock of a corporation still to be formed.

There can be a subscription only with reference to unissued shares of the Authorized Capital Stock (ACS), in the following cases: (1) The original issuance of the ACS at the time of incorporation. (2) The opening, during the life of the corporation, of the portion of the original ACS previously unissued; or (3) The increase in ACS achieved through a formal amendment of the Articles and registration thereof with the SEC. [Villanueva]

When pre-incorporation subscription is IRREVOCABLE: (1) For a period of at least 6 months from the date of subscription, UNLESS (a) all of the other subscribers consent to the revocation, or (b) the incorporation fails to materialize within six (6) months or within a longer period as may be stipulated in the contract of subscription; or (2) After the submission of the AOI to the SEC.

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POST-INCORPORATION SUBSCRIPTION It is entered into after incorporation.

MERCANTILE LAW

LIMITATIONS ON CONSIDERATION

Stocks shall NOT be issued:  for a consideration less than the par or issued price thereof  in exchange for promissory notes or future service

INTEREST ON UNPAID SUBSCRIPTION General Rule: Stockholder is NOT liable to pay interest on his unpaid subscription.

Notes: Promissory notes and future service may be used as consideration provided that certificates of stock will be issued ONLY AFTER actual encashment of promissory note or performance of such services.

Exception: If so required by the by-laws Rate: that fixed in the by-laws, otherwise, the legal rate [Sec. 66] Notes:  Shareholders are NOT creditors of the corporation with respect to their shareholdings thereto and the principle of compensation or set-off has no application.  Subscription contract is NOT required to be in writing.

SHARES OF STOCK NATURE OF STOCK

o Shares of stock are units into which the capital stock is divided. A share of stock represents interest of the holder thereof to participate in the management of the corporation, to share proportionally in the profits of the business and, upon liquidation, to obtain an aliquot part of corporate assets after all corporate debts have been paid. [Campos]  A stockholder may own the share even if he is not holding a certificate of stock.

CONSIDERATION FOR STOCKS FORMS OF CONSIDERATION [SEC.

62]

 Actual cash  Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued - Property should NOT be encumbered. Otherwise, it would impair the consideration. - Valuation is initially determined by the incorporators or the board of directors, subject to approval by the SEC.  Labor performed for or services actually rendered to the corporation;  Amounts transferred from unrestricted retained earnings to stated capital (declaration of stock dividends); and  Outstanding shares exchanged for stocks in the event of reclassification or conversion;  Previously incurred indebtedness of the corporation;

Share of Stock

Certificate of Stock

Evidence of the holder’s ownership of Unit of interest in a the stock and of his corporation right as a shareholder and up to the extent specified therein. An incorporeal or Concrete and tangible intangible property May be issued by the May be issued only if corporation even if the the subscription is fully subscription is not fully paid paid Stockholders of F. Guanzon and Sons, Inc. v Register of Deeds of Manila (1962): A share of stock only typifies an aliquot part of the corporation's property, or the right to share in its

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proceeds to that extent when distributed according to law and equity, but its holder is not the owner of any part of the capital of the corporation. Nor is the shareholder entitled to the possession of any definite portion of its property or assets. The stockholder is not a coowner or tenant in common of the corporate property.

MERCANTILE LAW

the same with the corporate secretary shall be solidarily liable with the stockholder concerned to the corporation and its creditors for the difference in value [Sec. 65]. TRUST FUND DOCTRINE FOR LIABILITY FOR WATERED STOCKS  Where the corporation issues watered stock and thereby assumes an ostensible capitalization in excess of its real assets, the transaction necessarily involves the misleading of subsequent creditors, and whether done with that purpose actually in mind or not, is at least a constructive fraud upon creditors. Hence, it is held that recovery may be had by a creditor in such case, even though the corporation itself has no cause of action against the stockholders. Some of the earlier decisions put the right of recovery in such a case upon the so-called “trust fund doctrine.” In any view of the matter, however, the creditors’ right of action to compel the making good of the representation as to the corporation’s capital is based on fraud, and the trust fund doctrine is only another way of expressing the same underlying idea. [De Leon]  Despite the view of foreign authors that the fraud theory is the prevailing view, it would seem that in the Philippine jurisdiction, the trust fund doctrine on watered stock prevails.

SUBSCRIPTION AGREEMENTS (SEE ABOVE) CONSIDERATION FOR SHARES OF STOCK (SEE ABOVE) WATERED STOCK DEFINITION These are shares issued as fully paid when in truth no consideration is paid in any form, or the consideration received is known to be less than the par value or issued value of the shares. [Sec. 65] These include the following:  Issued without consideration (bonus share)  Issued as fully paid when the corporation has received less sum of money than its par or issued value (discounted share)  Issued for consideration other than actual cash (i.e., property or services), the fair valuation of which is less than its par or issued value  Issue stock dividend when there are no sufficient retained earnings or surplus profit to justify it.

Philippine Trust Corp. v. Rivera (1923): It is established doctrine that subscription to the capital of a corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts (citing Velasco v. Poizat, 1918). A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary.

Note: Subsequent increase in the value of the property used in paying the stock does not do away with the watered stocks. Subsequent increase in the value of the property used in paying the stock does not cure the defect in issuance. The existence of watered stocks is determined at the time of issuance of the stock. LIABILITY OF DIRECTORS FOR WATERED STOCKS Any director or officer of a corporation consenting to the issuance of watered stocks or who, having knowledge thereof, does not forthwith express his objection in writing and file

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MERCANTILE LAW

PREFERRED SHARES Stocks which are given preference by the issuing corporation in dividends and the distribution of assets of the corporation in case of liquidation or such other preferences as may be stated in the AOI which do not violate the Corporation Code.

SITUS OF THE SHARES OF STOCK Chua Guan v. Samahang Magsasaka, Inc. (1935): It is a general rule that for purposes of execution, attachment and garnishment, it is not the domicile of the owner of a certificate but the domicile of the corporation which is decisive.

CLASSES OF SHARES OF STOCK

Limitations:  Preferred shares can only be issued with par value.  Preferred shares must be stated in the Articles of Incorporation and in the certificate of stock.  The BOD may fix the terms and conditions only when so authorized by the AOI and such terms and conditions shall be effective upon filing a certificate thereof with the SEC.

Shares of stock of stock corporations may be divided into classes or series of shares or both. Each class or series of shares may have rights, privileges or restrictions, as stated in the AOI. Classification of shares:  Common shares  Preferred shares  Par value shares  No-par value shares  Founder’s shares  Redeemable shares  Treasury shares  Convertible shares  Non-voting shares

PAR VALUE SHARES o These are shares with a stated value set out in the AOI. This remains the same regardless of the profitability of the corporation. This gives rise to financial stability and is the reason why banks, trust corporations, insurance companies and building and loan associations must always be organized with par value shares.  Par value is minimum issue price of such share in the AOI which must be stated in the certificate.

General Rule: No share may be deprived of voting rights [Sec. 6] Exceptions:  Preferred or  Redeemable shares,  Provided by the Code (e.g., Treasury shares)

NO-PAR VALUE SHARES  These are shares without a stated value.  “A no par share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of such shares of the issuing corporation” [Agbayani]

There shall always be a class/series of shares which have COMPLETE VOTING RIGHTS [Sec. 6] Doctrine of Equality of Shares Each share shall be EQUAL in ALL respects to every other share, except as otherwise provided in the AOI and stated in the certificate of stock [Sec. 6]

Limitations:  No-par value shares cannot have an issue price of less than P5.00 per share [Sec. 6].  They shall be deemed fully paid and nonassessable and the holders of such shares shall not be liable to the corporation or to its creditors in respect thereto [Sec. 6].  Entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends [Sec. 6].

COMMON SHARES The most common type of shares, which enjoy no preference but the owners thereof are entitled to management of the corporation and to equal pro-rata division of profits after preference. It represents a residual ownership interest in the corporation.

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 AOI must state the fact that the corporation issues no-par shares and the number of shares.  Banks, insurance companies, trust companies, building and loan associations, and public utilities cannot issue no-par value shares [Sec. 6].  The issued price may be fixed in the AOI, or by the BOD pursuant to authority conferred upon it by the AOI, or, in the absence thereof, by majority vote of the outstanding shares in a meeting called for the purpose [Sec. 62].

MERCANTILE LAW

 Redemption cannot be made if such redemption will result in insolvency or inability of the corporation to meet its obligations [SEC Opinion, 24 Aug 1987]. Note: Redeemable shares reacquired shall be considered retired and no longer issuable, unless otherwise provided in the Articles of the redeeming corporation [SEC Rules Governing Redeemable and Treasury Shares, 26 April 1982]. TREASURY SHARES [SEC. 9] These are shares which have been issued and fully paid for, but subsequently re-acquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the BOD.

FOUNDER’S SHARES [SEC. 7]  These are shares, classified as such in the AOI, which are given certain rights and privileges not enjoyed by the owners of other stocks.  Where exclusive right to vote and be voted for in the election of directors is granted, such right must be for a limited period not to exceed 5 years subject to approval by SEC. The 5 year period shall commence from date of approval by SEC.

CIR v. Manning (1975) cited in San Miguel Corporation v. Sandiganbayan (2000): Treasury shares are issued shares, but being in the treasury, do not have the status of outstanding shares. Consequently, although a treasury share, not retired by reacquisition, may be reissued or resold, such share, as long as it is held by the corporation as a treasury share, participates neither in the dividends, because dividends cannot be declared by the corporation to itself nor in the meetings of the corporation as voting stock, for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation, though it still represents a paid for interest in the property of the corporation.

REDEEMABLE SHARES [SEC. 8] These are shares which permit the issuing corporation to redeem or purchase its shares. Limitations:  Redeemable shares may be issued only when expressly provided for in the AOI [Sec. 8].  The terms and conditions affecting said shares must be stated both in the AOI and in the certificate of stock [Sec. 8].  Redeemable shares may be deprived of voting rights in the AOI.  The corporation is required to maintain a sinking fund to answer for redemption price if the corporation is required to redeem.  The redeemable shares are deemed retired upon redemption unless otherwise provided in the AOI (i.e., if the AOI allows for reissuance of such shares).

Note: Delinquent stocks, which are stocks that have not been fully paid, may become treasury stocks upon bid of the corporation in absence of other bidders [Sec.68]. CONVERTIBLE SHARES A type of preferred stock that the holder can exchange for a predetermined number of common shares at a specified time

Republic Planters Banks v. Agana (1997): URE is NOT necessary before shares can be redeemed but there must be sufficient assets to pay the creditors and to answer for operations.

NON-VOTING SHARES [SEC. 6] General Rule: Non-Voting Shares are not entitled to vote.

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Exceptions:  Amendment of the AOI  Adoption and amendment of by-laws  Sale, lease, exchange, other disposition of all or substantially all of the corporate property  Incurring, creating or increasing bonded indebtedness  Increase or decrease of capital stock  Merger and consolidation  Investment of corporate funds in another corporation or business  Dissolution of the corporation

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NOTICE REQUIREMENT Where call is necessary, notice must be given to the stockholder concerned. A call without notice to the subscriber is practically no call at all. Lingayen Gulf Electric Power Co., Inc. v. Baltazar (1965): The notice is regarded as a condition precedent to the right of recovery. It must, therefore, be alleged and proved to maintain an action for the call. The right to notice of call, however, may be waived by the subscriber. [De Leon]

PAYMENT OF BALANCE OF SUBSCRIPTION [SEC. 66 & 67]

SALE OF DELINQUENT SHARES [SEC.

68]

Delinquent Shares - These are shares for which the corresponding subscription or balance remains unpaid after a grace period of 30 days from the date specified in the contract of subscription or from the date stated in the call made by the BOD. [Sec. 67]

CALL BY BOARD OF DIRECTORS

 The board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary.  Payment shall be made on the date specified in the contract of subscription or on the date stated in the call. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided for in the by-laws. If within 30 days from said date no payment is made, all stocks covered by said subscription shall become delinquent and subject to sale under Sec. 68 unless the BOD orders otherwise.  There are two (2) instances when call is not necessary to make the subscriber liable for payment of the unpaid subscription:  When, under the terms of the subscription contract, subscription is payable, not upon call, but immediately, or on a specified day, or when it is payable in installments at specified times; and  If the corporation becomes insolvent, which makes the liability on the unpaid subscription due and demandable, regardless of any stipulation to the contrary in the subscription agreement [Villanueva]

EFFECT OF DELINQUENCY [SEC. 71]  No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholders’ meeting  The holder thereof shall NOT be entitled to any of the rights of a stockholder except the right to dividends. But the dividends it will receive will be subject to Sec. 43, that is, cash dividends shall first be applied to the unpaid balance on the subscription plus costs and expenses, and stock dividends shall be withheld until the unpaid subscription is fully paid.  Such shares shall be subject to delinquency sale. CALL BY RESOLUTION OF THE BOARD OF DIRECTORS [SEC. 68] The board of directors may, by resolution, order the sale of delinquent stock and shall specifically state the amount due on each subscription plus all accrued interest, and the date, time and place of the sale which shall not be less than 30 days nor more than 60 days from the date the stocks became delinquent, which is 30 days after the date specified in the contract of subscription or on the date stated in the call.

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NOTICE OF SALE If the BOD resolves to proceed with the sale: (1) Notice of sale and a copy of the resolution shall be sent to every delinquent stockholder either personally or by registered mail. (2) Notice of sale shall furthermore be published once a week for two (2) consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located.

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transferred to such purchases in the books of the corporation and a certificate of such stock shall be issued in his favor. The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares. Irregularities in the delinquency sale [Sec. 69]  Action to recover delinquent stock must be on the ground of irregularity or defect in the notice of sale.  Party seeking to recover must first pay or tender to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate.  The action must be commenced within six (6) months from the date of sale.

AUCTION SALE AND THE HIGHEST BIDDER Procedure for delinquency sale [Sec. 68]  Call for payment made by the BOD.  Notice of call served on each stockholder.  Notice of delinquency issued by the BOD upon failure of the stockholder to pay within 30 days from date specified.  Service of notice of delinquency on the nonpaying subscriber, PLUS publication in a newspaper of general circulation in the province or city where the principal office of the corporation is located, once a week for two (2) consecutive weeks.

CERTIFICATE OF STOCK NATURE OF THE CERTIFICATE

A certificate of stock is an instrument formally issued by the corporation with the intention that the same constitute the best evidence of the rights and status of a SH (not a condition precedent to the acquisition of such rights).

NOTE  Requirements on notice and publication are mandatory. Lacking such requirements, the stockholder may question the sale as provided under Sec. 69.  Public auction - the highest bidder is one who is willing to pay the balance of the subscription for the least number of shares. If there are no bidders, the corporation must bid for the whole number of shares regardless of how much the SH has paid. Such stocks will pertain to the corporation as fully paid treasury stocks.  The delinquent stockholder may stop the auction by paying to the corporation on or before the date specified for the sale the balance due on his subscription, plus accrued interest, costs of advertisement and expenses of the sale.  Otherwise, the public auction shall proceed and the delinquent shares shall be sold to the bidder that will pay the full amount of the balance of subscription with accrued interest, costs and expenses of the sale, for the smallest number of shares or fraction of a share. The stock so purchased shall be

Makati Sports Club v. Cheng (2010): A certificate of stock is the paper representative or tangible evidence of the stock itself and of the various interests therein. The certificate is not a stock in the corporation but is merely evidence of the holder’s interest and status in the corporation, his ownership of the share represented thereby. It is not in law the equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but is not essential to the existence of a share of stock or the nature of the relation of shareholder to the corporation.

UNCERTIFICATED SHARES

Uncertificated Shares/Securities Security evidenced by electronic or similar records [Sec. 3.14, Securities Regulation Code] Notwithstanding Sec. 63 of the Corporation Code (certificate of stock and transfer of shares), a corporation whose securities are registered

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pursuant to the SRC or listed on securities exchange may:  If so resolved by the Board of Directors and agreed by a shareholder, investor or securities intermediary, issue shares to, or record the transfer of some or all its shares into the name of such shareholders, investors or, securities intermediary in the form of uncertified securities

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De los Santos v. Republic (1955): This notwithstanding, it is well-known that the instrument is non-negotiable, because the holder thereof takes it without prejudice to such rights or defenses as the registered owner or creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel. Certificates of stock are not negotiable instruments. Consequently, a transferee under a forged assignment acquires no title which can be asserted against the true owner, unless the latter’s negligence has been such as to create an estoppel against him. If the owner of the certificate has endorsed it in blank, and it is stolen from him, no title is acquired by on innocent purchaser for value.

The use of uncertified securities in these circumstances shall be without prejudice to the rights of the securities intermediary subsequently to require the corporation to issue a certificate in respect of any shares recorded in its name; and  If so provided in its articles of incorporation and by-laws, issue all of the shares of a particular class in the form of uncertificated securities and subject to a condition that investors may not require the corporation to issue a certificate in respect of any shares recorded in their name.

REQUIREMENTS FOR VALID TRANSFER OF STOCKS For a valid transfer of stocks, the requirements are as follows:  There must be delivery of the stock certificate;  The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and

Transfers of uncertificated securities, how made  Valid as between parties - validly made and consummated by appropriate book-entries in the securities intermediaries, or in the stock and transfer book held by the corporation or the stock transfer agent.

Bitong v. Court of Appeals (1998): To be valid against third parties, the transfer must be recorded in the books of the corporation.

A transfer made pursuant to the foregoing has the effect of delivery of a security in bearer form or duly indorsed in blank representing the amount of security or right transferred, including the unrestricted negotiability of that security by reason of such delivery.

No shares of stock against which the corporation holds an unpaid claim shall be transferable in the books of the corporation [Sec. 63]. Republic v. Estate of Hans Menzi (2005): The Corporation Code acknowledges that the delivery of a duly indorsed stock certificate is sufficient to transfer ownership of shares of stock in stock corporations. Such mode of transfer is valid between the parties. In order to bind third persons, however, the transfer must be recorded in the books of the corporation. Clearly then, the absence of a deed of assignment is not a fatal flaw which renders the transfer invalid.

 Valid as to corporation – when the transfer is recorded in the books of the corporation so as to show the names of the parties to the transfer and the number of shares transferred (Sec. 43, Securities Regulation Code).

NEGOTIABILITY Theory of Quasi-Negotiability A stock certificate is regarded as quasinegotiable only in the sense that it may be transferred by endorsement, coupled with delivery.

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Requisites for a valid transfer per Sec. 63: (a) Between the parties: (i) Delivery (ii) Indorsement (b) To be valid as to third persons: (i) Recorded in the books of the corporation

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the alleged transferee. On the other hand, a person who has purchased stock, and who desires to be recognized as a stockholder for the purpose of voting, must secure such a standing by having the transfer recorded on the corporate books. Until the transfer is registered, the transferee is not a stockholder but an outsider.

Rural Bank of Lipa City v. CA (2001): The execution of a deed of sale does not necessarily make the transfer effective. The delivery of the stock certificate duly indorsed by the owner is the operative act that transfers the shares. The absence of delivery is a fatal defect which is not cured by mere execution of a deed of assignment.

ISSUANCE FULL PAYMENT General Rule: No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid [Sec. 64]

Ponce v. Alsons Cement Corp. (2002): The stock and transfer book is the basis for ascertaining the persons entitled to the rights and subject to the liabilities of a stockholder. Where a transferee is not yet recognized as a stockholder, the corporation is under no specific legal duty to issue stock certificates in the transferee’s name.

Exception: Baltazar v. Lingayen Gulf Electric Power Company (1965): Where it was the practice of the corporation since its inception to issue certificates of stock to its individual SHs for unpaid shares of stock and to give full voting power to shares fully paid.

Citing Hager v. Bryan (1911): A mandamus should not issue to compel the secretary of a corporation to make a transfer of the stock on the books of the company, unless it affirmatively appears that he has failed or refused so to do, upon the demand either of the person in whose name the stock is registered, or of some person holding a power of attorney for that purpose from the registered owner of the stock.

PAYMENT PRO RATA Nava Peers Mktg. Corp. and Fua Cun v. Summers (1923):The entire subscription must be paid first before the certificates of stock can be issued. Partial payments are to be applied pro rata to each share of stock subscribed.

LOST OR DESTROYED CERTIFICATES Procedure for re-issuance in case of loss, stolen or destroyed certificates:  Registered owner to file an affidavit of loss with the corporation.  Publication of notice of loss in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for 3 consecutive weeks at the expense of the owner of the certificate of stock  Cancellation of the certificate in the books of the corporation and issuance of new certificates, after the expiration of 1 year from the date of the last publication and there is no contest. The right to make such contest shall

Batangas Laguna Tayabas Bus Co. v. Bitangas (2001): A transfer of shares is not valid unless recorded in the books of the corporation. The purpose of registration is two-fold: (a) to enable the transferee to exercise all the rights of a stockholder, including the right to vote and to be voted for, and (b) to inform the corporation of any change in share ownership so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder. Until challenged in a proper proceeding, a stockholder of record has a right to participate in any meeting; his vote can be properly counted to determine whether a stockholders’ resolution was approved, despite the claim of

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be barred after the expiration of the one-year period.  Issuance of new certificates before 1 year period if the registered owner files a bond and there is no pending contest regarding the ownership of said certificates.

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SALE OF PARTIALLY PAID SHARES Under Section 63 of the Corporation Code, no shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. Therefore, a corporation may refuse to acknowledge and register a sale or assignment of shares which are not fully paid, and may continue to hold the original subscriber liable on the payment of the subscription.

Note: Except in cases of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against the corporation which shall have issued certificates of stock in lieu of those lost, stolen or destroyed pursuant to the above procedure.

However, in China Banking Corp. v. CA (1997), the court said that the above principle in Section 63 cannot be utilized by the corporation to refuse to recognize ownership over pledged shares purchased at public auction. The term “unpaid claims” refers to “any unpaid claims arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transactions. Obligations arising from unpaid monthly dues do not fall within the coverage of Section 63.”

STOCK AND TRANSFER BOOK CONTENTS

 a record of all stocks in the names of the stockholders alphabetically arranged;  the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment;  a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and  such other entries as the by-laws may prescribe.

SALE OF A PORTION OF SHARES NOT FULLY PAID

The SEC has opined on several occasions that a stockholder who has not paid the full amount of his subscription cannot transfer part of his subscription in view of the indivisible nature of a subscription contract. The reason behind the principle of disallowing transfer of not fully paid subscription to several transferee is that it would be difficult to determine whether or not the partial payments made should be applied as full payment for the corresponding number of shares which can only be covered by such payment or as proportional payment to each and all of the entire number of subscribed shares, and it would be difficult to determine the unpaid balance to be assumed by each transferee. [Villanueva]

WHO MAY MAKE VALID ENTRIES

 An SEC-licensed stock transfer agent; or  The Corporate Secretary of the stock corporation provided all rules and regulations imposed on stock transfer agents shall be applicable, except payment of license fee.

DISPOSITION AND ENCUMBRANCE OF SHARES ALLOWABLE RESTRICTIONS ON THE SALE OF SHARES General Rule: Shares of stock so issued are personal property and may be transferred [Sec. 63]. (FREE TRANSFERABILITY OF SHARES)

SALE OF ALL OF SHARES NOT FULLY PAID

On the other hand, the SEC has opined that the entire subscription, although not yet fully paid, may be transferred to a single transferee, who as a result of the transfer must assume the unpaid balance. It is necessary, however, to secure the consent of the corporation since the

Exception: In CLOSE corporations, restrictions on the right to transfer shares may be provided in the AOI, by-laws and certificates [Sec. 98].

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transfer of subscription rights and obligations contemplates a novation of contract which under Article 1293 of the Civil Code cannot be made without the consent if the creditor. [Villanueva]

dispositions of shares of stock vis-à-vis pledges, mortgages, attachment or levy thereof. To be valid and binding on third parties, the voluntary sale, assignment or disposition of shares requires the essential element of registration in the stock and transfer book; otherwise the sale, assignment or disposition is considered void as to third parties, even when they have actual notice. Whereas, when it comes to pledge, mortgage, encumbrance, attachment or levy of shares, registration thereof in the stock and transfer book is not essential either for validity or as a species of notifying third parties. [Villanueva]

SALE OF FULLY PAID SHARES

Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer however shall be valid except as between the parties until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred [Sec. 63]

Dissolution and Liquidation

Dissolution of a corporation is the extinguishment of its franchise and the termination of its corporate existence or business purpose. However, for the purpose only of winding up its affairs and liquidating its assets, its corporate existence continues for a period of 3 years from such dissolution [Sec. 122].

REQUISITES OF A VALID TRANSFER

Same as requirements for valid transfer of stocks

INVOLUNTARY SHARES

DEALINGS

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WITH

 The right of a stockholder to pledge, mortgage or otherwise encumber his shares is recognized under Section 55 of the Corporation Code, which regulates the manner of voting on pledged or mortgaged shares.  If the restriction on the right to pledge or mortgage shares of stock absolutely prohibits the stockholders from pledging or mortgaging their shares without the consent of the board of directors, it would be violative of the statutory right of the stockholders to encumber shares of stock as allowed in Section 55. However, when the restriction merely allows the corporation or existing stockholders to accept the offer within the option period, and thereafter, if no one accepts the offer, the stockholder is free to pledge or mortgage his shares in favor of any third party, such provision is reasonable, valid and binding.  By the strict application of Section 63 of the Corporation Code to cover only the sale, assignment or absolute disposition of shares of stock, the Supreme Court has placed a bias against voluntary sales, assignments or

MODES OF DISSOLUTION According to some decisions, the method of effecting dissolution as prescribed by law are exclusive, and a corporation cannot be dissolved except in the manner prescribed by law. [De Leon]

VOLUNTARY

Note: If no dissolution papers are filed with the SEC by a corporation claiming dissolution voluntarily, such corporation is still deemed legally existing, notwithstanding the fact that it has ceased to operate. [De Leon] WHERE NO CREDITORS ARE AFFECTED

[SEC. 118]

Notice of the meeting should be given to the stockholders or members by personal delivery or registered mail at least 30 days prior to the meeting. The notice of meeting should also be published for 3 consecutive weeks in a newspaper

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published in the place where the principal office of said corporation is located. If no newspaper is published in such place, then in a newspaper of general circulation in the Philippines.

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no newspaper in the city or municipality of the principal office, posting for 3 consecutive weeks in 3 public places is sufficient.  After the expiration of the time to file objections, a hearing shall be conducted upon prior 5 day notice to hear the objections.  Judgment shall be rendered dissolving the corporation and directing the disposition of assets. The judgment may include appointment of a receiver.  As long as 2/3 vote is obtained, no member/ stockholder can prevent such dissolution unless the majority stockholders acted in bad faith. The latter may be held liable for damages. (Campos)

The resolution to dissolve must be approved by the majority of the directors/trustees and approved by the stockholders representing at least 2/3 of the OCS or 2/3 of members.  Non-voting shares are entitled to vote in this matter [Sec. 6. Par 6(8)] A copy of the resolution shall be certified by the majority of the directors or trustees and countersigned by the secretary. The signed and countersigned copy will be filed with the SEC and the latter will issue the certificate of dissolution.

BY SHORTENING OF CORPORATE TERM A voluntary dissolution may be effected by amending the AOI. Upon approval of the amended AOI or the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings. A publication of notice of dissolution is required and cannot be dispensed with by alleging that it was not required in Section 120 and that no creditors will be prejudiced by its dissolution. [SEC Opinion, August 30, 1988]

Note: Daguhoy Enterprises v. Ponce (1954): Thus, except for the expiration of its term, no dissolution can be effective without some act of the State. WHERE CREDITORS ARE AFFECTED [SEC. 119]  A petition shall be signed by a majority of its board of directors or trustees or other officers having management of its affairs.  The petition must be verified by its president, or secretary or one of its director or trustees.  Approval of the stockholders representing at least 2/3 of the OCS or 2/3 of members in a meeting called for that purpose.  Filing of a petition with the SEC signed by majority of directors or trustees or other officers having the management of its affairs verified by the President or Secretary or Director. Claims and demands must be stated in the petition.  If the petition is sufficient in form and substance, the SEC shall issue an order fixing the date on or before which objections to the petition may be filed. Such date shall not be less than 30 days nor more than 60 days after the entry of the order.  A copy of the order shall be published at least once a week for 3 consecutive weeks in a newspaper of general circulation, or if there is

SEC Opinion No. 06-20, March 13, 2006:  If the shortened term expires before the SEC approval- the corporation will be dissolved upon the SEC approval  If the shortened term expires after the SEC approval - the corporation will be dissolved upon the expiration of the shortened term  If SEC fails to act within 6 months from filing of the amended AOI and shortened term expires after the 6-month period - the corporation will be dissolved upon the expiration of the shortened term  If SEC fails to act within 6 months from filing of the amended AOI and shortened term expires before the 6-month period- the corporation will be dissolved at the end of the 6-month period. [Campos]

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The corporation may show that the failure to commence its business or to continuously operate is due to causes beyond its control [Sec. 22].

INVOLUNTARY BY EXPIRATION OF CORPORATE TERM Once the period expires, the corporation is automatically dissolved without any other proceeding and it cannot thereafter be considered a de facto corporation.

LEGISLATIVE DISSOLUTION The inherent power of Congress to make laws carries with it the power to amend or repeal them. Involuntary corporate dissolution may be effected through the amendment or repeal of the Corporation Code. [implied from Section 145, De Leon]

FAILURE TO ORGANIZE AND COMMENCE BUSINESS WITHIN 2 YEARS FROM INCORPORATION Failure to formally organize and commence the transaction of its business or construction of its works within two years - its corporate powers shall cease and the corporation shall be deemed dissolved [Sec. 22].  Dissolution in this case is automatic. (Campos)  Contrary view: Since there is a defense available to the corporation, that is, if its failure to organize and commence its business is due to causes beyond the control of the corporation as may be determined by the SEC, therefore, the dissolution is not automatic.

The limitations on the power to dissolve corporations by legislative enactment are as follows: (1) Under the Constitution, the amendment, alteration, or repeal of the corporate franchise of a public utility shall be made only “when the common good so requires”; (2) Under Section 145 of the Code, it is provided that: “No right or remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part thereof”; (3) While Congress may provide for the dissolution of a corporation, it cannot impair the obligation of existing contracts between the corporation and third persons, or take away the vested rights of its creditors. [De Leon]

Mentholatum v. Mangaliman (1946): Transacting business implies a continuity of acts or dealings in the accomplishment of the purpose for which the corporation was formed. Formal organization includes not only the adoption of the by-laws but also the establishment of the body which will administer the affairs of the corporation and exercise its powers  By-laws should be adopted within one month of receipt of official notice of the issuance of the certificate of incorporation, otherwise the certificate may be suspended or revoked [PD 902-A, Sec. 6 (i)(5)]

DISSOLUTION BY THE SEC ON GROUNDS UNDER EXISTING LAWS A corporation may be dissolved by the SEC, upon a verified complaint and after proper notice and hearing, on the following grounds [Sec. 6, par. i, PD 902-A]:  Fraud in procuring its certificate of registration  Serious misrepresentation as to what the corporation can or is doing to the great prejudice of or damage to the general public  Refusal to comply or defiance of any lawful order of the Commission restraining

Failure to operate for at least 5 consecutive years after commencement of business ground for suspension or revocation of its corporate franchise or certificate of incorporation. Note: Dissolution in this case is not automatic. [Campos]

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   

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commission of acts which would amount to a grave violation of its franchise Continuous inoperation for a period of at least five years Failure to file by-laws within the required period Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period Other grounds

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as "trustees" by legal implication to complete the corporate liquidation. Alhambra Cigar and Cigarette Mfg. v. SEC (1968): A corporation under liquidation may not amend its articles of incorporation to extend its lifespan. When a corporation is liquidating pursuant to the statutory period of three years to liquidate, it is only allowed to continue for the purpose of final closure of its business and no other purposes. In fact, within that period, the corporation is enjoined from “continuing the business for which it was established”.

Other grounds:  Violation by the corporation of any provision of the Corporation Code [Sec. 144 BP 68]  In case of a deadlock in a close corporation, and the SEC deems it proper to order the dissolution of the corporation as the only practical solution to the dispute [Sec. 104 BP 68]

CONVEYANCE TO A TRUSTEE WITHIN A 3YEAR PERIOD From and after any such conveyance by the corporation of its property in trust for the benefit of its SH/members/creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest.

METHODS OF LIQUIDATION

Liquidation is the process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders. It is a proceeding in rem.

Reburiano v. CA (1999): The trustee (of a dissolved corporation) may commence a suit which can proceed to final judgment even beyond the three-year period (of liquidation) . . . , no reason can be conceived why a suit already commenced by the corporation itself during its existence, not by a mere trustee who, by fiction, merely continues the legal personality of the dissolved corporation, should not be accorded similar treatment — to proceed to final judgment and execution thereof.

BY THE CORPORATION ITSELF Under Section 122 of the Corporation Code, a corporation whose corporate existence is terminated in any manner continues to be a body corporate for three (3) years after its dissolution for purposes of prosecuting and defending suits by and against it and to enable it to settle and close its affairs, culminating in the disposition and distribution of its remaining assets. It may, during the three-year term, appoint a trustee or a receiver who may act beyond that period.

Board of Liquidators v Kalaw (1967): Unless the trusteeship is limited in its duration by the deed of trust, there is no time limit within which the trustee must finish liquidation.

Pepsi-Cola Products Philippines, Inc. v. CA (2004): The termination of the life of a corporate entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity. If the three-year extended life has expired without a trustee or receiver having been expressly designated by the corporation, within that period, the board of directors (or trustees) itself, may be permitted to so continue

BY MANAGEMENT COMMITTEE OR REHABILITATION RECEIVER Leyte Asphalt & Mineral Oil Co. Ltd., v. Block Johnston & Breenbrawn (1928): However, the mere appointment of a receiver, without anything more does not result in the dissolution of the corporation nor bar it from the exercise of its corporate rights.

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MERCANTILE LAW

Other Corporations

Upon five (5) days’ notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation [Sec. 119]

CLOSE CORPORATIONS

A close corporation is one whose articles of incorporation provide that: (1) All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class [Sec. 96].

LIQUIDATION AFTER THREE YEARS Phil. Veterans Bank v. Employees Union (2001): Q: What is the difference between Liquidation and Rehabilitation?

Notes:  A corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code.  Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest.  The AOI must state that the number of stockholders shall not exceed 20.  The AOI must contain restriction on the transfer of issued stocks (which must appear in the AOI, by-laws and certificate of stock)

A: Liquidation is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss. On the other hand, rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. Both cannot be undertaken at the same time. Reburiano v CA (1999): If full liquidation can only be effected after the 3-year period and there is no trustee, the directors may be permitted to complete the liquidation by continuing as trustees by legal implication. Aguirre vs. FQB+, Inc. (2013): A corporation’s board of directors is not rendered functus officio by its dissolution. Since Section 122 allows a corporation to continue its existence for a limited purpose, necessarily there must be a board that will continue acting for and on behalf of the dissolved corporation for that purpose.

San Juan Structural and Steel Fabricators v. CA (1998): The mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personalities. So too, a narrow distribution of ownership does not, by itself, make a close corporation. When a corporation’s AOI does not contain the provisions enumerated under Sec. 96 of the Code, such corporation is not a “close corporation”. It does not become one either, just because only a few individuals owned 99.866% of its subscribed capital stock.

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General Rule: Free transferability of shares Shares of stock so issued are personal property and may be transferred

of the transferring stockholder with such reasonable terms, conditions or period stated therein. After expiration of said period and upon failure of the existing stockholders or the corporation to purchase said shares, the transferring stockholder may sell his shares to any third person.

Exception: In close corporations: Considering the special circumstances attending a close corporation (e.g. formed by persons who know each other well, thus they would want to choose the persons who will be allowed in their group), it is justifiable and even imperative for its stockholders to protect themselves from future conflicts by placing restrictions on the right of each one of them to transfer his shares to an outsider.

Presumptions [Sec. 99]:  If the stock certificate CONSPICUOUSLY shows the restriction, the purchaser or transferee is CONCLUSIVELY presumed to have notice of the restriction, provided this appears in the AOI.  Where a conclusive presumption of notice arises, the corporation may, at its option, refuse to register the transfer, unless - all the stockholders have consented to the transfer, or - the AOI has been properly amended to remove the restriction.  If it appears in the certificate, but NOT CONSPICUOUSLY, then although he may be presumed to have notice of the restriction, he can prove the contrary.

Restriction on the transfer must NOT be more onerous than granting the existing SH or corporation the option to purchase the shares (Right of First Refusal). The stocks cannot be listed in the stock exchange nor be publicly offered.

CHARACTERISTICS CORPORATION

OF

A

CLOSE

ISSUANCE OR TRANSFER OF STOCK IN BREACH OF QUALIFYING CONDITIONS

The stockholders themselves can directly manage the corporation and perform the functions of directors without need of election [Sec. 97]:  When they manage, stockholders are liable as directors;  There is no need to call a meeting to elect directors;  The stockholders active in the management of the close corporation are personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance [Sec. 100(5)].

VALIDITY OF RESTRICTIONS TRANSFER OF SHARES

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 If stock of a close corporation is issued or transferred to any person who is not entitled under any provision of the articles of incorporation to be a holder of record of its stock, and if the certificate for such stock conspicuously shows the qualifications of the persons entitled to be holders of record thereof, such person is conclusively presumed to have notice of the fact of his ineligibility to be a stockholder.  If the articles of incorporation of a close corporation states the number of persons, not exceeding twenty (20), who are entitled to be holders of record of its stock, and if the certificate for such stock conspicuously states such number, and if the issuance or transfer of stock to any person would cause the stock to be held by more than such number of persons, the person to whom such stock is issued or transferred is conclusively presumed to have notice of this fact.

ON

Validity of Restrictions [Sec. 98]  Restrictions must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith.  Restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares

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 If a stock certificate of any close corporation conspicuously shows a restriction on transfer of stock of the corporation, the transferee of the stock is conclusively presumed to have notice of the fact that he has acquired stock in violation of the restriction, if such acquisition violates the restriction.  Whenever any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed under this section to have, notice either (a) that he is a person not eligible to be a holder of stock of the corporation, or (b) that transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, or (c) that the transfer of stock is in violation of a restriction on transfer of stock, the corporation may, at its option, refuse to register the transfer of stock in the name of the transferee.  The provisions of subsection (4) shall not be applicable if the transfer of stock, though contrary to subsections (1), (2) of (3), has been consented to by all the stockholders of the close corporation, or if the close corporation has amended its articles of incorporation in accordance with this Title.  The term "transfer", as used in this section, is not limited to a transfer for value.  The provisions of this section shall not impair any right which the transferee may have to rescind the transfer or to recover under any applicable warranty, express or implied [Sec. 99]

 The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or  All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing [Sec. 101]

WHEN BOARD MEETING IS UNNECESSARY OR IMPROPERLY HELD

When Improperly Held  When a director’s meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend.  UNLESS he promptly files his written objection with the secretary of the corporation after having knowledge thereof [Sec. 101]

Manuel R. Dulay Enterprises v. CA (1993):  In a close corporation, a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president. At any rate, corporate action taken at a board meeting without proper call or notice in a close corporation is deemed ratified by the absent director unless the latter promptly files his written objection with the secretary of the corporation after having knowledge of the meeting.  Dulay's protestations of complete innocence to the effect that he never participated nor was even aware of any meeting or resolution authorizing the mortgage or sale of the subject premises is difficult to believe. On the contrary, he is very much privy to the transactions involved. To begin with, he is an incorporator and one of the board of directors designated at the time of the organization of the corporation. In ordinary parlance, the said entity is loosely referred to as a "family corporation."  Here, the sale of real property was contracted by the president of a close corporation with the knowledge and acquiescence of its board of directors.

When Unnecessary – Any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if:  Before or after such action is taken, written consent thereto is signed by all the directors; or  All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or

PRE-EMPTIVE RIGHT

The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services,

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or in payment of corporate debts, UNLESS the articles of incorporation provide otherwise [Sec. 102].

AMENDMENT OF INCORPORATION

ARTICLES

OF

Amendment to the AOI which seeks to:  delete or remove any provision required to be contained in the AOI of Close Corporations (under the Title on Close Corporations); or  to reduce a quorum or voting requirement stated in said AOI Requires the affirmative vote of at least 2/3 of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as may be specifically provided in the AOI at a meeting duly called.

DEADLOCKS

Requisites (1) The directors or stockholders are so divided respecting the management of the corporation's business and affairs (2) The votes required for any corporate action cannot be obtained that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally Powers of the SEC in case of Deadlock in Close Corporations  Cancel or alter any provision in the articles of incorporation or by-laws  Cancel, alter or enjoin any resolution of the corporation  Direct or prohibit any act of the corporation  Require the purchase at their fair value of shares of any stockholder either by any stockholder or by the corporation regardless of the availability of unrestricted retained earnings.  Appoint a provisional director  Dissolve the corporation  Granting such other relief as the circumstances may warrant.

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Close Corporations

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Regular Corporations Management / Board Authority

There can be classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and

There are no classification of board of directors

The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect:

Corporate Powers devolved upon board of directors whose powers are executed by officers. Cannot provide that it be managed by stockholders

No meeting of stockholders need be called to elect directors. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code.

Board of directors must be elected in a stockholders meeting Stockholders of a corporation are separate and distinct from directors

The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors.

Officers must be elected by the Board of Directors

Meetings Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: (1) Before or after such action is taken, written consent thereto is signed by all the directors; or (2) All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing; or (3) The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or (4) All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing. If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof.

The directors or trustees shall not act individually nor separately but as a body in a lawful meeting. They will act only after discussion and deliberation of matters before them. Contracts entered into without a formal board resolution does not bind the corporation except when ratified or when majority of the board has knowledge of the contract and the contract benefited the corporation. Absence of a prompt objection in writing does not ratify acts done by directors without a valid meeting. There must be express or implied ratification. Express ratification may consist of a Board Resolution to that effect Implied ratification may consist of acceptance of benefits from said unauthorized act while having knowledge of said act

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Close Corporations

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Regular Corporations Failure to give notice would render a meeting voidable. Attendance to a meeting despite want of notice will be deemed implied waiver All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (§51) Voting / Quorum

The AOI may provide for a classification of directors into one or more classes, each of which may be voted for and elected solely by a particular class of stock.

No share may be deprived of voting rights, except Preferred or Redeemable shares, unless otherwise provided by the Code

The AOI may provide for a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code.

For Board of directors, the by-laws or AOI can provide for a greater majority in quorum

There shall always be a class/series of shares which have COMPLETE VOTING RIGHTS EACH SHARE SHALL BE EQUAL IN ALL RESPECTS TO EVERY OTHER SHARE, except as otherwise provided in the AOI

For stockholders, the AOI can provide for a different percentage in quorum

Pre-emptive Right The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise.

Limitations on the exercise of pre-emptive right: (a) Such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; (b) Not extend to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt Shall not take effect if denied in the Articles of Incorporation or an amendment thereto.

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Close Corporations

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Regular Corporations Transferability

Restrictions on the right to transfer shares must appear in the AOI and in the by-laws as well as in the certificate of stock otherwise the same shall not be binding on any purchaser thereof in good faith

Restrictions on the right to transfer not allowed

Withdrawal Right Any stockholder of a close corporation may, for any reason, compel the said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock Any stockholder of a close corporation may, by written petition to the SEC, compel the dissolution of such corporation whenever: (a) Any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or (b) Corporate assets are being misapplied or wasted.

Stockholders may require the corporation to buyback their shares at fair value when the Corporation has Unrestricted Retained Earnings: (a) In case of any amendment to the articles of incorporation which has the effect of: (i) changing or restricting the rights of any stockholder or class of shares, or (ii) authorizing preferences in any respect superior to those of outstanding shares of any class, or (iii) extending or shortening the term of corporate existence (b) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and (c) In case of merger or consolidation (d) Investment of corporate funds in another corporation or businessDiversion of funds of corporation from primary purpose to secondary purpose (§41) The corporation may buy-back shares of stockholders subject to the following limitations (Treasury shares): (a) There must be unrestricted retained earnings (b) Must be for a legitimate purpose

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Procedure for the Plan for Distribution  Board of Trustees, by majority vote in a resolution, shall adopt a plan for distribution of the assets of the corporation  Written notice for a meeting must be sent to all members entitled to vote, stating the time and place of such meeting and the purpose thereof  At such meeting, the plan must be approved by 2/3 votes of the members having the right to vote, who are present or represented by proxy [Villanueva]

NON-STOCK CORPORATIONS DEFINITION

One where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution. [Sec.87]

PURPOSES           

MERCANTILE LAW

Charitable Religious Educational Professional Cultural Fraternal Literary Scientific Social Civic services Similar purposes, such trade, industry or agriculture and like chambers, or combinations thereof

RELIGIOUS CORPORATIONS Corporation Sole [Sec. 110]  A special form of corporation, usually associated with clergy and consists of one person only and his successors, who are incorporated by law to give some legal capacities and advantages.  A registered corporation sole can acquire land if its members constitute at least 60% Filipinos [SEC Opinion, 8 August 1994].

TREATMENT OF PROFITS

Any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized. [Sec. 87,2nd sentence]

Nationality Roman Catholic Apostolic Church v. Land Registration Commission (1957): A corporation sole does not have any nationality but for purposes of applying our nationalization laws, nationality is determined by the nationality of the members.

DISTRIBUTION OF ASSETS UPON DISSOLUTION

Religious Societies Non-stock corporation formed by a religious society, group, diocese, synod, or district of any religious denomination, sect, or church after getting the approval of 2/3 of its members.

Order of Distribution of Assets Upon Dissolution of Non-Stock Corporation  All its creditors shall be paid.  Assets held subject to return on dissolution shall be delivered back to the givers.  Assets held for charitable, religious purposes, etc., without a condition for their return on dissolution, shall be conveyed to one or more organizations engaged in similar activities as dissolved corporation  All other assets shall be distributed to members, as provided in the AOI or by-laws [Sec. 94]

Iglesia Evangelica Metodista En Las Filipinas (Corporation Sole) Inc., et al v. Bishop Nathanael Lazaro, et al (2010): The Corporation Code provides no specific mechanism for amending the articles of incorporation of a corporation sole. But Section 109 allows the application to religious corporations of the general provisions governing non-stock corporations. For non-stock corporations, the power to amend its AOI lies in its members. The code requires

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two-thirds of their votes for the approval of such an amendment. So how will this requirement apply to a corporation sole that has technically but one member (the head of the religious organization) who holds in his hands its broad corporate powers over the properties, rights, and interests of his religious organization?

MERCANTILE LAW

principle, however, does not prevent a corporation from acting in another State or country with the latter’s express or implied consent. This is the “consent doctrine” which is provided in Sections 125 and 126. But every power which a corporation exercises as such in another State depends for its validity upon the laws of the sovereignty in which it is exercised. A corporation can exercise none of the functions and privileges conferred by its charter in another State or country except by the comity and consent of such State or country. (De Leon)

Although a non-stock corporation has a personality that is distinct from those of its members who established it, its AOI cannot be amended solely through the action of its BOT. The amendment needs the concurrence of at least two-thirds of its membership. If such approval mechanism is made to operate in a corporation sole, its one member in whom all the powers of the corporation technically belongs, needs to get the concurrence of two-thirds of its membership. The one member is but a trustee of its membership.

DOCTRINE OF “DOING BUSINESS” (RELATE TO DEFINITION UNDER THE FOREIGN INVESTMENTS ACT, R.A. NO. 7042) Tests of “Doing Business in the Philippines” (Asked in ‘98 and ‘02) Twin Characterization Test - Mentholatum v. Mangaliman (1941)  Under the Continuity Test, doing business implies a continuity of commercial dealings and arrangements, or performance of acts normally incidental to the purpose and object of the organization.  Under the Substance Test, a foreign corporation is doing business in the country if it is continuing the body or substance of the enterprise of business for which it was organized

There is no point to dissolving the corporation sole of one member to enable the corporation aggregate to emerge from it. The one member, with the concurrence of two-thirds of the membership of the organization for whom he acts as trustee, can self-will the amendment. He can, with membership concurrence, increase the technical number of the members of the corporation from “sole” or one to the greater number authorized by its amended articles.

Contract test - Pacific Vegetable Oil v. Singson (1955): A foreign corporation is doing business in the Philippines if the contracts entered into by the foreign corporation or by an agent acting under the control and direction of the foreign corporation are consummated in the Philippines.

FOREIGN CORPORATIONS

Foreign Corporation are those formed, organized, or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state [Sec. 123].

BASES OF AUTHORITY OVER FOREIGN CORPORATIONS

“Doing Business” Under the Foreign investment Act of 1991 [Sec. 3(d), RA 7042) (Asked in ‘98 and ‘02] Doing Business  Soliciting orders, service contracts, or opening offices;  Appointing representatives, distributors domiciled in the Philippines or who stay for a period or periods totaling 180 days or more;

CONSENT As a rule, a foreign corporation can have no legal existence or status beyond the bounds of the State or sovereignty by which it is created or incorporated and organized. It exists only in contemplation of law and by force of the law and where that law ceases to operate, the corporation can have no existence. This

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 Participating in the management, supervision, or control of any domestic business, firm, entity, or corporation in the Philippines;  Any act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to some extent the performance of acts or works or the exercise of some functions, normally incident to and in progressive prosecution of the purpose and object of its organization.

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Jurisprudential Rules on “Not Doing Business in the Philippines” Agilent Tech. Singapore Ltd. v. Integrated Silicon Tech. Phils. Corp. (2004): Products manufactured off-shore and returned back to foreign corporation Marshall-Wells Co. v. Henry Eiser & Co. (1924): Single isolated transaction. Antam Consolidated v. CA (1986): Multiple transactions are still considered a single transaction where there are constantly failed attempts in complying with the contract by one of the contracting parties.

Cargill v. Intra-Strata Assurance Corporation (2010): “Doing business” in the Philippines relates to “acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization.” It also relates to “business activities… not only casual, but so systematic and regular as to manifest continuity and permanence of activity to constitute doing business here…” To constitute doing business in the Philippines, the activity should involve profit-making.

General Garments v. Director of Patents (1971): Trademark protection; foreign corporations not doing business are merely protecting their property rights. Le Chemise Lacoste v. Fernandez (1984): A foreign firm which does business through middlemen acting on their own names shall not be deemed doing business in the Philippines. Cargill v. Intra-Strata Assurance Corporation (2010): A foreign company that merely imports goods from a Philippine exporter, without opening an office or appointing an agent in the Philippines, is NOT doing business in the Philippines.

European Resources and Technologies Inc. v. Ingenieuburo Birkhanh + Nolte (2004): A single act or transaction may be considered as “doing business” when a corporation performs acts for which it was created or exercises some of the functions for which it was organized. The act of participating in a bidding process constitutes “doing business” because it shows the foreign corporation’s intention to engage in business in the Philippines. In this regard, it is the performance by a foreign corporation of the acts for which it was created, regardless of volume of business, that determines whether a foreign corporation needs a license or not.

NECESSITY OF A LICENSE TO DO BUSINESS REQUISITES FOR ISSUANCE OF A LICENSE  The foreign corporation should file a copy of its articles of incorporation and by-laws, and a verified application [See Sec. 125] accompanied by the following: - Name and address of its designated resident agent who will receive summons and notices for the corporation; a special power of attorney should also be submitted for such purpose - An agreement that if it ceases to transact business or if there is no more resident agent, summons shall then be served through the SEC - Oath of Reciprocity stating that the foreign corporation’s country allows Filipino citizens

Not Doing Business  Mere investment as shareholder and exercise of rights as investor;  Having a nominee director or officer to represent its interest in the corporation;  Appointing a representative or distributor which transacts business in its own name and for its own account.

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and corporations to do business in said country  Within 60 days from issuance of license, the corporation should deposit at least P100,000 (cash, property, bond) for the benefit of creditors subject to further deposit every six months (See Sec. 126).

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PERSONALITY TO SUE A foreign corporation transacting business in the Philippines is required to secure a license to have the personality to sue before, or intervene in, any court or administrative proceeding. [Campos; Sec. 133] Agilent Technologies Singapore v. Integrated Silicon Technologies (2004): The principles regarding the right of a foreign corporation to bring suit in Philippine courts may thus be condensed in four statements:  if a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts [Sec. 133, Corporation Code];  if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction [Eastboard Navigation, Ltd. v. Juan Ysmael& Company, Inc., 102 Phil. 1, 1957];  if a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporation’s corporate personality in a suit brought before Philippine courts [Merrill Lynch Futures v. Court of Appeals, G.R. No. 97816, 24 July 1992, 211 SCRA 824]; and  if a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction.

Avon Insurance PLC v. CA (1997): Before a foreign corporation can transact business in the Philippines, it must first obtain a license to transact business here and secure the proper authorizations under existing law. If a foreign corporation engages in business activities without the necessary requirements, it opens itself to court actions against it, but it shall not be allowed maintain or intervene in an action, suit or proceeding for its own account in any court or tribunal or agency in the Philippines. The purpose of the law in requiring that foreign corporations doing business in the country be licensed to do so, is to subject the foreign corporations doing business in the Philippines to the jurisdiction of the courts, otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required license and authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the local courts. The same danger does not exist among foreign corporations that are indubitably not doing business in the Philippines. Indeed, if a foreign corporation does not do business here, there would be no reason for it to be subject to the State’s regulation.

SUABILITY OF FOREIGN CORPORATIONS

RESIDENT AGENT Resident Agent is an individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation [Sec. 127-128].

A Foreign Corporation whether or not doing business in the Philippines may be sued for acts done against persons in the Philippines. Facilities Management Corporation v. De La Osa (1979): Indeed if a foreign corporation, not engaged in business in the Philippines, is not barred from seeking redress from courts in the Philippines, a fortiori, that same corporation cannot claim exemption from being sued in Philippine courts for acts done against a person or persons in the Philippines

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INSTANCES WHEN UNLICENSED FOREIGN CORPORATIONS MAY BE ALLOWED TO SUE 

 Isolated transactions, i.e. not ‘doing business’ in the Philippines, [Sec. 133, Corporation Code];  Action to protect good name, goodwill, and reputation of a foreign corporation;  The subject contracts provide that Philippine courts will be the venue to controversies;  A license subsequently granted enables the foreign corporation to sue on contracts executed before the grant of the license;  Recovery of misdelivered property;  Where the unlicensed foreign corporation has a domestic corporation.







Merrill Lynch Futures v. Court of Appeals (1992): When the Philippine citizen or entity is estopped from challenging the foreign corporation’s personality to sue Status



Consequence

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of any amendment to its articles of incorporation or by laws or of any articles of merger or consolidation within the time prescribed by this Title; A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to this Title; Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions; Transacting business in the Philippines outside of the purpose or purposes for which such corporation is authorized under its license; Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines; or Any other ground as would render it unfit to transact business in the Philippines [Sec. 134]

UNDER SPECIAL LAWS Insurance Code The Insurance Commissioner is authorized to suspend or revoke all certificates of authority granted to an insurance company, whether domestic or foreign, when:  it is in unsound condition; or  it has failed to comply with the provisions of law or regulations obligatory upon it; or  its condition or method of business is such as to render its proceedings hazardous to the public or to its policyholders; or  its paid-up capital stock, in the case of a foreign company, is impaired or deficient, or that the margin of solvency required of such company is deficient [Sec. 247, Insurance Code]

Doing Business in the Can sue and be sued PH, WITH a license Doing Business in the Cannot sue, but may PH, WITHOUT a license be sued in the PH NOT doing business in May sue; the PH, on isolated may be sued transactions [Facilities Management v. Dela Osa 89 SCRA 131]

GROUNDS FOR REVOCATION OF LICENSE UNDER THE CORPORATION CODE  Failure to file its annual report or pay any fees as required by this Code;  Failure to appoint and maintain a resident agent in the Philippines as required by this Title;  Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a statement of such change as required by this Title;  Failure to submit to the Securities and Exchange Commission an authenticated copy

General Banking Act The Monetary Board may revoke the license to transact business in the Philippines of any foreign bank, if it finds that:  the foreign bank is insolvent; or  in imminent danger thereof; or  its continuance in business will involve probable loss to those transacting business with it.

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Mergers and Consolidations

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formed in the case of merger; and with respect to the consolidated corporation in case of consolidation

ARTICLES OF MERGER OR CONSOLIDATION

DEFINITION AND CONCEPT Merger – a corporation absorbs the other and remains in existence while the others are dissolved. [Sec.76]  One of the constituent corporations remains as an existing juridical person, whereas the other corporation shall cease to exist. Merger is the disappearance of one of the corporations [generally by amending the articles of incorporation and shortening its term of existence (Sec.40)] with the other corporation acquiring all the assets, rights of action, and assuming all the liabilities of the disappearing corporation.

Each of the constituent corporation shall execute Articles of Merger or Consolidation signed by the president/vice-president, and certified by the secretary/assistant secretary setting forth:  Plan of merger or consolidation;  For stock corporation, the number of shares outstanding; for non-stock, the number of members;  As to each corporation, number of shares or members voting for and against such plan respectively. The Articles of Merger or Consolidation:  take the place of the Articles of Incorporation of the consolidated corporation; or  amend the Articles of Incorporation of the surviving corporation.

Consolidation – a new corporation is created, and consolidating corporations are extinguished [Sec.76]  If there is consolidation, there will be disappearance of all constituent corporations with the emergence of a new corporate entity which shall obtain all the assets of the disappearing corporations, and likewise shall assume all their liabilities.

PROCEDURE

 Approval by majority vote of each of the board of directors or trustees of the constituent corporations of the plan of merger or consolidation.  Approval by the stockholders or members of each of such corporations. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of such plan. o Holders of non-voting shares are entitled to vote on the plan. [Sec. 6, par. 6(6)]  Notice of such meetings shall be given to all stockholders or members of the respective corporations, at least two (2) weeks prior to the date of the meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation.  Any dissenting stockholder in stock corporations may exercise his appraisal right

CONSTITUENT VS. CONSOLIDATED CORPORATION Constituent Corporations – the parties to a merger or consolidation Consolidated Corporation - The new single corporation created through consolidation. Surviving Corporation – one of the constituent corporations which remain in existence after the merger

PLAN OF MERGER OR CONSOLIDATION [SEC. 76]

Each of the constituent corporations must draw up a Plan of Merger or Consolidation which shall set forth:  Names of the corporation involved;  Terms and mode of carrying it;  Statement of changes, if any, in the present articles of the surviving corporation to be

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

 

 

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in accordance with the Code. Provided, that if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished. Amendment to the plan of merger or consolidation may be made by approval of the majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation. Articles of Merger or Articles of Consolidation shall be executed by each of the constituent corporations. Submission of Four (4) copies of the Articles of Merger or Articles of Consolidation to the SEC for approval. o Mergers and consolidations of corporations governed by special laws requires a recommendation from the appropriate government agency [Sec. 79 (1)] If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two (2) weeks before. Issuance of certificate of merger or consolidation.

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LIMITATIONS In the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained [Sec. 79]

EFFECTS [SEC. 80]

 The constituent corporations shall become a single corporation.  The separate existence of the constituents shall cease, except that of the surviving or the consolidated corporation. o The absorbed or constituent corporations are ipso facto dissolved by operation of law [SEC Opinion, July 16, 1981]; there is no liquidation of the assets of the dissolved corporations [Campos].  The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation.  The surviving or the consolidated corporation shall possess all rights, privileges, immunities and franchises of each constituent corporation and the properties shall be deemed transferred to and vested in the surviving or consolidated corporation without further act or deed.  All liabilities of the constituents shall pertain to the surviving or the consolidated corporation [assumption of liability is automatic [De Leon; Campos]].  Any claim, action or proceeding pending by or against any of the constituent corporations may be prosecuted by or against the surviving or consolidated corporation; and  The rights of the creditors or lien upon the property of any of each constituent corporation shall not be impaired by such merger or consolidation.

EFFECTIVITY

Upon issuance of the certificate of merger or consolidation, such merger or consolidation shall become effective [Sec. 79]. PNB v. Andrada Electric & Engr. Co., Inc. (2002): Merger or consolidation does not become effective by mere agreement of the constituent corporations. The approval of the SEC is required. Notwithstanding Section 79, parties may stipulate a specific effective date of merger (or consolidation) where no third party will be prejudiced [SEC Opinion No. 09-13, July 1, 2009].

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State policy

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political subdivision thereof on the basis of reciprocity: Provided, That the Commission may require compliance with the form and content for disclosures the Commission may prescribe;  Rationale: This is rooted in comity among nations. (c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body;  Rationale: This is not a public offering. Besides, protection is already afforded by that “proper adjudicatory body” and additional SEC protection is not necessary. (d) Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board, or the Bureau of Internal Revenue.  Rationale: The issuers are governmental agencies covered by exception (a) above. SEC protection would be a duplication. (e) Any security issued by a bank except its own shares of stock [Sec. 9.1]  Rationale: Banks are under the supervision of the Bangko Sentral. SEC protection is a duplication. (f) Any class of security with respect to which the SEC finds that registration is not necessary in the public interest and for the protection of investors [Sec. 9.2]  NOTE: The exemption of securities by the SEC must be made through the issuance of a rule or regulation [Sec. 9.2]

Section 2. Declaration of State Policy. The State shall (1) Establish a socially conscious, free market that regulates itself; (2) Encourage the widest participation of ownership in enterprises; (3) Enhance the democratization of wealth; (4) Promote the development of the capital market; (5) Protect investors; (6) Ensure full and fair disclosure about securities; (7) Minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market

Securities required to be registered General Rule: Securities shall not be sold or offered for sale or distribution to the public within the Philippines, without a registration statement duly filed with and approved by the Commission [Sec. 8.1]  The Securities Regulation Code (SRC) regulates public offering within the Philippines. Exceptions: (1) Exempt securities [Sec. 9] (a) Any security issued or guaranteed by the Government of the Philippines/ its political subdivision or agency/its instrumentality/ or any person controlled or supervised thereby;  Rationale for the exception: The public does not need protection from the government itself. The government will always be solvent to pay its obligations because of its ability to raise revenues through taxation. (b) Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or

(2) Exempt transactions (a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy.  Rationale for exclusion: A court will presumably not order the sale if the public will be prejudiced thereby. (b) By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling or offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provision of this Code, to liquidate a bona

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fide debt, a security pledged in good faith as security for such debt.  Rationale: This is not a voluntary sale contemplated by the SRC. (c) An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner’s account, such sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transaction of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security.  Rationale: Isolated and not meant to be an ongoing public offering. (d) The distribution by a corporation actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus.  Rationale: The offerees are not the public but shareholders already familiar with their company. (e) The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock.  Rationale: Same as (d) above. (f) The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, when the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale.  Rationale: This is not a public sale. (g) The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under this Code or was, when sold, exempt from the provision of this Code, and that the security issued and

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delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under this Code. Upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold.  Rationale: The SEC has already registered the convertible security and presumably also passed upon the security to be issued upon conversion. (h) Broker’s transaction, executed upon customer’s orders, on any registered Exchange or other trading market.  Rationale: If broker’s transactions are registered each time, the transactions on the exchange will be unduly hampered. Besides, the brokers are subject to a “code of conduct” protective of the interest of the investors. (i) Subscriptions for shares of the capitals stocks of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stocks under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscription is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased.  Rationale: This is not a public offering. Besides, the SEC is involved in the subscription process, as a regulator. (j) The exchange of securities by the issuer with the existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.  Rationale: This is not a public offering. (k) The sale of securities by an issuer to fewer than twenty (20) persons in the

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Philippines during any twelve-month period.  Rationale: This is not a public offering but a private placement. (l) The sale of securities to any number of the following qualified buyers: (i) Bank; (ii) Registered investment house; (iii) Insurance company; (iv) Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; (v) Investment company or; (vi) Such other person as the Commission may by rule determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management. [Sec. 10.1]  Rationale: These are sophisticated investors that could fend for themselves. (m) Any transaction with respect to which the SEC finds that registration is not necessary in the public interest and protection of investors such as by the reason of the small amount involved or the limited character of the public offering [Sec. 10.2]

“securities” that have to be registered with the SEC before they can be distributed and sold. An investment contract is a contract, transaction, or scheme where a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others.

NOTE: Application for exemption under Section 10 must be accompanied by: (1) A notice identifying the exemption relied upon; (2) Payment of fee equivalent to 1/10 of 1% of the maximum value aggregate price or issued value of the securities.

Power Homes Unlimited Corporation v. Sec and Manero (2008): An investment contract is defined in the Amended IRR of R.A. No. 8799 (SRC) as a “contract, transaction or scheme (collectively ‘contract’) whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others.”

Apart from the definition which the IRR provides, Philippine jurisprudence has so far not done more to add to the same. Of course, the United States Supreme Court, grappling with the problem, has on several occasions discussed the nature of investment contracts. That court’s rulings, while not binding in the Philippines, enjoy some degree of persuasiveness insofar as they are logical and consistent with the country’s best interests. The US SC held in Securities and Exchange Commission v. W.J. Howey Co. (1946) that, for an investment contract to exist, the following elements, referred to as the HOWEY TEST must concur: (1) a contract, transaction, or scheme; (2) an investment of money; (3) investment is made in a common enterprise; (4) expectation of profits; and (5) profits arising primarily from the efforts of others. Thus, to sustain the SEC position in this case, PCI’s scheme or contract with its buyers must have all these elements.

Sec v. Prosperity.com, Inc. (2012): [This case involves the application of the Howey test in order to determine if a particular transaction is an investment contract.] The sole issue is whether or not Prosperity.com Inc.’s (PCI) scheme constitutes an investment contract that requires registration under the SRC.

Although the proponents must establish all four elements, the US Supreme Court stressed that the Howey Test “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”

The SRC treats investment contracts as

After Howey came the 1973 US case of SEC v. Glenn W. Turner Enterprises, Inc. et al. In this

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case, the 9th Circuit of the US Court of Appeals ruled that the element that profits must come “solely” from the efforts of others should not be given a strict interpretation. It held that a literal reading of the requirement “solely” would lead to unrealistic results. It reasoned out that its flexible reading is in accord with the statutory policy of affording broad protection to the public. Our RA 8799 (SRC) appears to follow this flexible concept for it defines an investment contract as a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits not solely but primarily from the efforts of others.

MERCANTILE LAW

Such register and all documents or information with respect to the securities registered therein shall be open to public inspection at reasonable hours on business days.  Shall include the effect of the securities issue on ownership, on the mix of ownership, especially foreign and local ownership [Sec. 12.3]  Shall be signed by the issuer’s executive officer, its principal operating officer, its principal financial officer, its comptroller, its principal accounting officer, its corporate secretary, or persons performing similar functions accompanied by a duly verified resolution of the board of directors of the issuer corporation [Sec. 12.4]  Shall be accompanied by: (a) Written consent of the expert named as having certified any part of the registration statement or any document used in connection therewith; and (b) Where the registration statement includes shares to be sold by selling shareholders - a written certification by such selling shareholders as to the accuracy of any part of the registration statement contributed to by such selling shareholders [Sec. 12.4]. (2) Payment to the SEC of a fee of not more than one-tenth (1/10) of one per centum (1%) of the maximum aggregate price at which such securities are proposed to be offered [Sec. 12.5a] (3) Publication of the notice of the filing of registration statement. [Sec. 12.5b]  The publication must be in two (2) newspapers of general circulation in the Philippines, once a week for two (2) consecutive weeks, or in such other manner as the Commission by the rule shall prescribe [Sec. 12.5b] (4) Declaration by the SEC whether the registration statement is effective or rejected.  Declaration is made within 45 days from filing of the registration statement or on such later date to which the issuer has consented unless applicant has been allowed to amend the registration statement under Sec. 14 [Sec. 12.6].

Thus, to be a security subject to regulation by the SEC, an investment contract in our jurisdiction must be proved to be: (1) an investment of money, (2) in a common enterprise, (3) with expectation of profits, (4) primarily from efforts of others.

Procedure for registration of securities (1) Filing of a sworn registration statement with the SEC [Sec. 12.1]  Shall include any prospectus required or permitted to be delivered under Subsections 8.2, 8.3, and 8.4 [Sec. 12.1] Chapter III, Section 8. Requirement of Registration of Securities x x x 8.2 The Commission may conditionally approve the registration statement under such terms as it may deem necessary. 8.3 The Commission may specify the terms and conditions under which any written communication, including any summary prospectus, shall be deemed not to constitute an offer for sale under this Section. 8.4. A record of the registration of securities shall be kept in Register of Securities in which shall be recorded orders entered by the Commission with respect to such securities.

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(5) Statement under oath by the issuer in all prospectus that: (a) registration requirements have been met and (b) all information are true and correct as represented by the issuer or the one making the statement.  Statement under oath must be made upon effectivity of the registration statement. [Sec. 12.7]

NOTE: Grounds for: (1) rejection/revocation of registration statement and (2) refusal of registration/revocation of securities thereunder: (a) The issuer: (i) Has been judicially declared insolvent; (ii) Has violated any of the provision of this Code, the rules promulgated pursuant thereto, or any order of the Commission of which the issuer has notice in connection with the offering for which a registration statement has been filed (iii) Has been or is engaged or is about to engage in fraudulent transactions; (iv) Has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities; (v) Has failed to comply with any requirements that the Commission may impose as a condition for registration of the security for which the registration statement has been filed; or (b) The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statements of a material fact required to be stated therein or necessary to make the statement therein not misleading; or (c) The issuer, any officer, director or controlling person performing similar functions, or any under writer has been convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and /or fraud or is enjoined or restrained by the Commission or other competent or administrative body for violations of securities, commodities, and other related laws [Sec. 13.1] (d) If any issuer shall refuse to permit an examination to be made by the Commission [Sec. 13.3]

Prohibitions on fraud, manipulation and insider trading MANIPULATION OF SECURITY PRICES It shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly: (a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange of any other trading market ("Exchange"): (i) By effecting any transaction in such security which involves no change in the beneficial ownership thereof; (ii) By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or orders of substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or for the same or different parties; or (iii) By performing similar act where there is no change in beneficial ownership. (b) To affect, alone or with others, securities or transactions in securities that: (i) Raises their price to induce the purchase of a security, whether of the same or a different class of the same issuer or of controlling, controlled, or commonly controlled company by others; or (ii) Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close,

NOTE: A registration statement may be withdrawn by the issuer only with the consent of the Commission [Sec. 13.6].

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painting the tape, squeezing the float, hype and dump, boiler room operations and such other similar devices. (c) To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purchase or sale of such security. (d) To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange. (e) To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security; unless otherwise allowed by this Code or by rules of the Commission [Sec. 24.1]

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FRAUDULENT TRANSACTIONS It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to: (a) Employ any device, scheme, or artifice to defraud; [Sec. 26.1] (b) Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading [Sec. 26.2] (c) Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person [Sec. 26.3]

INSIDER TRADING

 What is sought to be addressed here is the asymmetry in information about a “public company” (such as a company listed on the Philippine Stock Exchange) between insiders and outsiders.  Insiders could have material information not yet known to the public about the company, and they might use this information to benefit themselves at the expense of the outsiders or the public. Therefore, they must not trade in the shares of the company pending the disclosure of such information to the public.

SHORT SALES The SEC is regulating transactions wherein the seller does not yet own or have the securities he is selling. He is required to show that he has made arrangements to effect delivery of such securities on settlement date; otherwise, the sale will not be allowed.

An INSIDER means: (a) The issuer; (b) A director or officer (or any person performing similar functions) of, or a person controlling the issuer; gives or gave him access to material information about the issuer or the security that is not generally available to the public; (c) A government employee, director, or officer of an exchange, clearing agency and/or selfregulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (d) A person who learns such information by a communication from any foregoing insiders [Sec. 3.8]

(a) No person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance. (b) No short sale shall be effected nor any stoploss order be executed in connection with the purchase or sale of any security except if allowed by the SEC [Sec. 24.2] Note: The SEC may allow certain acts or transactions under Sec. 24 (on Manipulation of Security Prices and Short Sales), for public interest and protection of investors [Sec. 24.3]

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‘Material non-public information’ means: (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) Would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security [Sec. 27.2]

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person will likely buy or sell a security of the issuer while in possession of such information [Sec. 27.3]

Protection of investors TENDER OFFER RULE  This protects the minority shareholders.  If a person or a group of persons (acting in concert) intends and is in discussion with certain shareholders of a public company (normally, the controlling shareholders) to acquire a substantial stake in such company (now, the threshold is 35% of the outstanding class of shares in a public company), the acquirer must make an offer to all the shareholders of the company to tender their shares at the price being offered to the controlling shareholders. o Before, the minority shareholders are left out; so, the acquirer only dealt with the controlling shareholders and disregarded the minority.

 It shall be unlawful for an insider: (a) To sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public, unless: (i) The insider proves that the information was not gained from such relationship; or (ii) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: (1) That he disclosed the information to the other party, or (2) That he had reason to believe that the other party otherwise is also in possession of the information [Sec. 27.1]

When a tender offer has commenced or is about to commence, It shall be unlawful for: (a) Any person (except the tender offeror) who is in possession of material nonpublic information relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if: (i) Such person knows or has reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer (b) Any tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, and any insider of such issuer to communicate material nonpublic information relating to the tender offer to any other person where such communication is likely to result in a violation of (a) [Sec. 27.4].

NOTE: Presumption that purchase or sale is effected while in possession of material nonpublic information arises: (1) If the purchase or sale is transacted after such information came into existence but prior to dissemination of such information to the public; and (2) The lapse of a reasonable time for market to absorb such information. Presumption may be rebutted by showing of purchaser’s or seller’s awareness of the material non-public information at the time of purchase or sale [Sec. 27.1] (b) To communicate material nonpublic information about the issuer or the security to any person who, by virtue of the communication, becomes an insider where the insider communicating the information knows or has reason to believe that such

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RULES ON PROXY SOLICITATION

Cemco Holdings, Inc. v. National Life Insurance Company of the Philippines, Inc. (2007): Tender offer is a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of a public company. Stated differently, a tender offer is an offer by the acquiring person to stockholders of a public company for them to tender their shares therein on the terms specified in the offer. Tender offer is in place to protect minority shareholders against any scheme that dilutes the share value of their investments. It gives the minority shareholders the chance to exit the company under reasonable terms, giving them the opportunity to sell their shares at the same price as those of the majority shareholders.

(1) Proxies shall be: (a) Issued in accordance with SEC rules and regulations; Proxy solicitations shall also be made in accordance with the said rules and regulations [Sec. 20.1] (b) In writing [Sec. 20.2] (c) Signed by the stockholder or his duly authorized representatives [Sec. 20.2] (d) Filed before the scheduled meeting with the corporate secretary [Sec. 20.2] (e) Valid only for the meeting for which it is intended unless otherwise provided in the proxy [Sec. 20.3] Note: No proxy shall be valid and effective for a period longer than five (5) years at one time [Sec. 20.3]

The coverage of the mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or “any type of acquisition.” [Case at bar: The indirect acquisition by CEMCO Holdings of 36% of UCC shares through the acquisition of the non-listed UCHC shares is covered by the mandatory tender offer rule.]

(2) A broker or dealer shall: (a) Not give any proxy, consent or any authorization, in respect of any security carried for the account of the customer, to a person other than the customer, without written authorization of such customer [Sec. 20.4] (b) If he holds or acquires the proxy for at least ten percent (10%) or such percentage as the Commission may prescribe of the outstanding share of such issuer, submit a report identifying the beneficial owner within ten days after such acquisition, for its own account or customer, to the issuer of security, to the exchange where the security is traded and to the Commission [Sec. 20.5]

The legislative intent of Section 19 of the Securities Regulation Code is to regulate activities relating to acquisition of control of the listed company and for the purpose of protecting the minority stockholders of a listed corporation. Whatever may be the method by which control of a public company is obtained, either through the direct purchase of its stocks or through an INDIRECT means, mandatory tender offer applies. What is decisive is the determination of the power of control. The legislative intent behind the tender offer rule makes clear that the type of activity intended to be regulated is the acquisition of control of the listed company through the purchase of shares. Control may [be] effected through a direct and indirect acquisition of stock, and when this takes place, irrespective of the means, a tender offer must occur. The bottom line of the law is to give the shareholder of the listed company the opportunity to decide whether or not to sell in connection with a transfer of control.

DISCLOSURE RULE Issuers, equity holders, and insiders are required to disclose certain information to the SEC.

DISCLOSURE BY THE ISSUER

(1) To the SEC Every issuer shall file with the Commission: (a) Annual Report within one hundred thirtyfive (135) days, after the end of the issuer’s fiscal year, or such other time as the Commission may prescribe

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(b) Such other periodical reports for interim fiscal periods and current reports on significant developments of the issuer as the Commission may prescribe as necessary to keep current information on the operation of the business and financial condition of the issuer [Sec. 17.1]

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listed on an Exchange or with assets in excess of P50,000,000.00 and having 200 or more holders, at least 200 of which are holding at least 100 shares of a class of its equity securities.” It is clear that a “public company,” as contemplated by the SRC, is not limited to a company whose shares of stock are publicly listed; even companies like the Bank, whose shares are offered ONLY to a specific group of people, are considered a public company, PROVIDED they meet the requirements enumerated [under Sections 17.1 and 17.2 of the SRC and/or under the Amended IRR of the SRC].

 NOTE: Under this Section, ‘issuer’ includes: (a) An issuer which has sold a class of its securities pursuant to a registration under section 12 hereof. o BUT the requirement shall be suspended for any fiscal year after the year such registration became effective if such issuer, as of the first day of any such fiscal year, has less than one hundred (100) holder of such class of securities or such other number as the Commission shall prescribe and it notifies the Commission of such; (b) An issuer with a class of securities listed for trading on an Exchange; and (c) An issuer with assets of at least Fifty million pesos (50,000,000.00) or such other amount as the Commission shall prescribe, and having two hundred (200) or more holders each holding at least one hundred (100) share of a class of its equity securities. o The obligation of such issuer to file report shall be terminated ninety (90) days after notification to the Commission by the issuer that the number of its holders holding at least one hundred (100) shares is reduced to less than one hundred (100) (Sec. 17.2)

(2) To the equity holders An annual report shall be furnished by every issuer which has a class of equity securities satisfying any of the requirements in Subsection 17.2 to each holder of such equity security (Sec. 17.5)

DISCLOSURE BY EQUITY HOLDERS

Any person who acquires directly or indirectly the beneficial ownership of more than five of per centum (5%) of such class or in excess of such lesser per centum as the Commission by rule may prescribe, shall, within ten (10) days after such acquisition or such reasonable time as fixed by the Commission, submit to: (1) the issuer of the securities; (2) to the Exchange where the security is traded; and (3) to the Commission, the following information: (a)The personal background, identity, residence, and citizenship of, and the nature of such beneficial ownership by, such person and all other persons by whom or on whose behalf the purchases are effected; in the event the beneficial owner is a juridical person, the line of business of the beneficial owner shall also be reported; (b)If the purpose of the purchases or prospective purchases is to acquire control of the business of the issuer of the securities, any plans or proposals which such persons may have that will effect a major change in its business or corporate structure; (c) The number of shares of such security which are beneficially owned, and the number of

Philippine Veterans Bank v. Callangan (2011): The ISSUE in this case is whether the Phil. Veterans Bank qualifies as a “public company” under Section 17.2 of the Securities Regulation Code (SRC) in relation with Rule 3(1)(m) of the Amended Implementing Rules and Regulations of the SRC, required to comply with the reportorial requirements set forth in Section 17.1 of the SRC. Under Rule 3(1)(m) of the Amended Implementing Rules and Regulations of the SRC, a “public company” is defined as “any corporation with a class of equity securities

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shares concerning which there is a right to acquire, directly or indirectly, by; (i) such person, and (ii) each associate of such person, giving the background, identity, residence, and citizenship of each such associate; and

material information about an issuer or a security that is not generally available to the public; or (d) A person who learns such information by a communication from any foregoing insiders [Sec. 3.8]

(d)Information as to any contracts, arrangements, or understanding with any person with respect to any securities of the issuer including but not limited to transfer, joint ventures, loan or option arrangements, puts or call guarantees or division of losses or profits, or proxies naming the persons with whom such contracts, arrangements, or understanding have been entered into, and giving the details thereof.

‘Material non-public information’ means: (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) Would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security [Sec. 27.2]

 NOTE: If it appears to the SEC that securities were acquired by person in the ordinary course of his business and were not acquired for the purpose of and do not have the effect of changing or influencing the control of the issuer nor in connection with any transaction having such purpose or effect it may permit any person to file in lieu of the statement required by subsection 17.1 hereof, a notice stating: (1) The name of such person; (2) The shares of any equity securities subject to Subsection 17.1 which are owned by him; (3) The date of their acquisition; and (4) Such other information as the commission may specify [Sec. 18.3]

 A beneficial owner of 10% of a public company becomes a “principal shareholder” required to disclose his interest to the SEC, the company, and the Philippine Stock Exchange (if the company is listed there).

Civil liability CIVIL LIABILITIES ON ACCOUNT OF FALSE REGISTRATION STATEMENT [SEC. 56] Civil liabilities arise when the registration statement or any part thereof contains on its effectivity: (1) An untrue statement of a material fact; or (2) Omission to state a material fact required to be stated therein or necessary to make such statements not misleading

DISCLOSURE BY INSIDER

An insider has the duty to disclose material information with respect to the issuer or the security that is not generally available to the public [Sec. 27.1]

Who may be liable? (a) Issuer and every person who signed the registration statement; (b) Director of/partner in the issuer at the time of the filing of the registration statement or any part, supplement or amendment thereof; (c) One who is named in the registration statement as being or about to become (b) and whose written consent thereto is filed with the registration statement;

An INSIDER means: (a) The issuer; (b) A director or officer (or any person performing similar functions) of, or a person controlling the issuer; gives or gave him access to material information about the issuer or the security that is not generally available to the public; (c) A government employee, director, or officer of an exchange, clearing agency and/or selfregulatory organization who has access to

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(d) Auditor/auditing firm named as having certified any financial statements used in connection with the registration statement or prospectus; (e) One who, with his written consent filed with the registration statement, has been named as having prepared or certified any part of the registration statement/any report or valuation which is used in connection with the registration statement; (f) Selling shareholder who contributed to and certified as to the accuracy of a portion of the registration statement; (g) Underwriter with respect to such security [Sec. 56.1]

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(b) Offeror or seller of a security, whether or not exempted by the provisions of this Code, by means of a prospectus or other written or oral communication which includes an:  untrue statement of a material fact OR  omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission)  DEFENSE: No knowledge of untruth or omission, despite the exercise of reasonable care [Sec. 57.1]. WHO MAY SUE? Purchaser of the security may sue to recover: (1) Consideration paid for such security with interest thereon, LESS the amount of any income received thereon, upon the tender of such security; or (2) For damages if he no longer owns the security [Sec. 57.1].

WHO MAY SUE? Any person who acquires the security AND who suffers damage  UNLESS it is proved that at the time of such acquisition he knew of such untrue statement or omission [Sec. 56.1]  NOTE: When the security is acquired AFTER the issuer has made generally available to its security holders an INCOME STATEMENT covering a period of at least twelve (12) months beginning from the effective date of the registration statement, the right of recovery under Section 56 shall be conditioned on proof that such person acquired the security RELYING UPON such untrue statement in the registration statement or relying upon the registration statement AND NOT KNOWING of such income statement [Sec. 56.2].

(2) LIABILITY OF MAKERS OF FALSE MISLEADING STATEMENTS WHO MAY BE LIABLE? Any person who shall make or cause to be made any statement in any report, or document filed pursuant to this Code or any rule or regulation thereunder, which statement as at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact  DEFENSE: Good faith and lack of knowledge of the false and misleading statement [Sec. 57.2].

CIVIL LIABILITIES ARISING IN CONNECTION WITH PROSPECTUS, COMMUNICATIONS AND REPORTS [SEC. 57]

WHO MAY SUE?  Purchaser or seller of security who purchased or sold at a price which was affected by such statement, NOT KNOWING that such statement was false or misleading, and RELYING UPON such statement  SUE FOR: Damages caused by such reliance [Sec. 57.2]

(1) LIABILITY OF SELLERS/OFFERORS WHO MAY BE LIABLE? (a) Offeror or seller of a security in violation of Chapter on Registration of Securities;

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under Section 11 (on Commodity Future Contracts) or 16 (on Pre-Need Plans) [Sec. 60.1]

CIVIL LIABILITY OF FRAUD IN CONNECTION WITH SECURITIES TRANSACTIONS [SEC. 58]

WHO MAY SUE? Any person sustaining damages as a result of such act or transaction [Sec. 60.1]

WHO MAY BE LIABLE? Any person who engages in any act or transaction in violation of Sections 19.2 (fraudulent, deceptive, or manipulative acts or practices in connection with tender offers), 20 (Proxy Solicitations) or 26 (Fraudulent Transactions), or any rule or regulation of the Commission thereunder.

CIVIL LIABILITY ON ACCOUNT OF INSIDER TRADING (1) LIABILITY FOR NON-DISCLOSURE WHO MAY BE LIABLE? (1) Any insider who violates Subsection 27.1 (on Insider’s Duty to Disclose When Trading); and (2) Any person in the case of a tender offer who violates Subsection 27.4 (a)(I), or any rule or regulation thereunder, by purchasing or selling a security while in possession of material information not generally available to the public [Sec. 61.1]

WHO MAY SUE?  Any person who purchases or sells any security, grants or refuses to grant any proxy, consent or authorization, or accepts or declines an invitation for tender of a security  SUE FOR: Damages as a result of the act or transaction.

CIVIL LIABILITY FOR MANIPULATION OF SECURITY PRICES [SEC. 59]

WHO MAY SUE? Any investor who, contemporaneously with the purchase or sale of securities that is the subject of the violation, purchased or sold securities of the same class  UNLESS such insider, or such person in the case of a tender offer, proves that such investor KNEW the information or would have purchased or sold at the same price REGARDLESS of disclosure of the information to him [Sec. 61.1]

WHO MAY BE LIABLE? Any person who WILLFULLY participates in any act or transaction in Section 24 (Manipulation of Security Prices). WHO MAY SUE?  Any person who shall purchase or sell any security at a price which was affected by such act or transaction  SUE FOR: Damages as a result of the act or transaction.

(2) LIABILITY FOR COMMUNICATING NON-PUBLIC INFORMATION ABOUT ISSUER

CIVIL LIABILITY WITH RESPECT TO COMMODITY FUTURES CONTRACTS AND PRE-NEED PLANS [SEC. 60]

WHO MAY BE LIABLE? (1) An insider who violates Subsection 27.3; (2) Any person in the case of a tender offer who violates Subsection 27.4 (a), or any rule or regulation thereunder communicating material nonpublic information shall be jointly and severally liable under Subsection 61.1 with, and to the same extent as, the insider, or person in the case of a tender offer, to whom the communication was directed and who is liable under Subsection

WHO MAY BE LIABLE? Any person who engages in any act or transactions in WILLFUL violation of any rule or regulation promulgated by the Commission

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61.1 by reason of his purchase or sale of a security [Sec. 61.2].

Commission thereunder, who, without just cause, hinders, delays or obstructs the making or filing of any such document, report, or information [Sec. 51.3]

LIABILITIES OF CONTROLLING PERSONS, AIDER AND ABETTOR AND OTHER SECONDARY LIABILITY (1)

LIABILITY PERSONS

OF

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(3) LIABILITY OF AIDER/ABETTOR WHO MAY BE LIABLE?  Any person who aids, abets, counsels, commands, induces or procures any violation of this Code, or any rule, regulation or order of the Commission thereunder [Sec. 51.4]  Every person who substantially assists the act or omission of any person primarily liable under Sections 57, 58, 59 and 60 of this Code, with knowledge or in reckless disregard that such act or omission is wrongful  Jointly and severally liable as an aider and abettor for damages resulting from the conduct of the person primarily liable [Sec. 51.5]  NOTE: An aider and abettor shall be LIABLE ONLY: o To the extent of his relative contribution in causing such damages in comparison to that of the person primarily liable, or o To the extent to which the aider and abettor was unjustly enriched thereby o whichever is GREATER [Sec. 51.5]  NOTE: It shall be unlawful for any person, DIRECTLY or INDIRECTLY, to do ANY act or thing which it would be unlawful for such person to do under the provisions of this Code or any rule or regulation thereunder [Sec. 51.2]

CONTROLLING

WHO MAY BE LIABLE? Every person who controls any person liable under this Code or the rules or regulations of the Commission thereunder, shall ALSO be liable jointly and severally with and to the same extent as such controlled persons to any person to whom such controlled person is liable [Sec. 51.1]  NOTE: ‘CONTROL’ may be: (a) By or through stock ownership, agency, or otherwise, or (b) In connection with an agreement or understanding with one or more other persons [Sec. 51.1]  DEFENSE: Lack of knowledge of the existence of facts by reason of which the liability of the controlled person is alleged to exist [Sec. 51.1]

(3) LIABILITY OF DIRECTOR/OFFICER FOR DELAY IN THE FILING OF REQUIRED DOCUMENTS WHO MAY BE LIABLE? Any director or officer of, or any owner of any securities issued by, any issuer required to file any document, report or other information under this Code or any rule or regulation of the

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Civil Liability Arising …

Who may be liable?

Who may Sue?

When the registration statement or any part thereof contains on its effectivity:  An untrue statement of a material fact; or  Omission to state a material fact required to be stated therein or necessary to make such statements not misleading

(a) Issuer and every person who signed the registration statement; (b) Director of/partner in the issuer at the time of the filing of the registration statement or any part, supplement or amendment thereof; (c) One who is named in the registration statement as being or about to become (b); (d) Auditor/auditing firm named as having certified any financial statements used in connection with the registration statement or prospectus; (e) One who, with his written consent filed with the registration statement, has been named as having prepared or certified any part of the registration statement/any report or valuation which is used in connection with the registration statement; (f) Selling shareholder who contributed to and certified as to the accuracy of a portion of the registration statement; (g) Underwriter with respect to such security [Sec. 56.1]

Any person who acquires the security and who suffers damage unless it is proved that at the time of such acquisition he knew of such untrue statement or omission [Sec. 56.1]

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NOTE: When the security is acquired after the issuer has made generally available to its security holders an income statement covering a period of at least twelve (12) months beginning from the effective date of the registration statement, the right of recovery under this subsection shall be conditioned on proof that such person acquired the security relying upon such untrue statement in the registration statement or relying upon the registration statement and not knowing of such income statement [Sec. 56.2]

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Civil Liability Arising …

Who may be liable?

Who may Sue?

When the registration statement or any part thereof contains on its effectivity:  An untrue statement of a material fact; or  Omission to state a material fact required to be stated therein or necessary to make such statements not misleading

(a) Issuer and every person who signed the registration statement; (b) Director of/partner in the issuer at the time of the filing of the registration statement or any part, supplement or amendment thereof; (c) One who is named in the registration statement as being or about to become (b); (d) Auditor/auditing firm named as having certified any financial statements used in connection with the registration statement or prospectus; (e) One who, with his written consent filed with the registration statement, has been named as having prepared or certified any part of the registration statement/any report or valuation which is used in connection with the registration statement; (f) Selling shareholder who contributed to and certified as to the accuracy of a portion of the registration statement; (g) Underwriter with respect to such security [Sec. 56.1]

Any person who acquires the security and who suffers damage unless it is proved that at the time of such acquisition he knew of such untrue statement or omission [Sec. 56.1]

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NOTE: When the security is acquired after the issuer has made generally available to its security holders an income statement covering a period of at least twelve (12) months beginning from the effective date of the registration statement, the right of recovery under this subsection shall be conditioned on proof that such person acquired the security relying upon such untrue statement in the registration statement or relying upon the registration statement and not knowing of such income statement [Sec. 56.2]

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Civil Liability Arising … In Connection With Prospectus, Communications and Reports [Sec. 57] (a) Liability of Sellers/Offerors

SECURITIES REGULATION CODE

Who may be liable?

MERCANTILE LAW

Who may Sue?

(a) Offeror or seller of a security Purchaser of the security may in violation of Chapter on sue to recover: Registration of Securities; (1) consideration paid for such (b) Offeror or seller of a security, security with interest thereon, whether or not exempted by less the amount of any the provisions of this Code, income received thereon, by means of a prospectus or upon the tender of such other written or oral security; or communication which (2) for damages if he no longer includes an untrue owns the security [Sec. 57.1]. statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission). Defense: No knowledge of untruth or omission, despite the exercise of reasonable care [Sec. 57.1].

In Connection With Prospectus, Any person who shall make or Communications and Reports cause to be made any statement [Sec. 57] in any report, or document filed pursuant to this Code or any rule (b) Liability of Makers of False or regulation thereunder, which Misleading Statements statement as at the time and in the light of the circumstances under which it was made false or misleading with respect to any material fact

Purchaser or seller of security who purchased or sold at a price which was affected by such statement knowing that such statement was false or misleading, and relying upon such statement may sue for damages caused by such reliance [Sec. 57.2].

Defense: Good faith and lack of knowledge of the false and misleading statement [Sec. 57.2]. Fraud in Connection with Any person who engages in any Securities Transactions [Sec. 58] act or transaction in violation of Sections 19.2, 20 or 26, or any rule or regulation of the Commission thereunder

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Any other person who purchases or sells any security, grants or refuses to grant any proxy, consent or authorization, or accepts or declines an invitation for tender of a security who sustained damages as a result of the transaction.

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Civil Liability Arising …

SECURITIES REGULATION CODE

Who may be liable?

Manipulation of Security Prices Any person who willfully [Sec. 59] participates in any act or transaction in Section 24 (Manipulation of Security Prices).

MERCANTILE LAW

Who may Sue? Any person who shall purchase or sell any security at a price which was affected by such act or transaction

With Respect to Commodity Any person who engages in any Any person sustaining damages Futures Contracts and Pre-need act or transactions in willful as a result of such act or Plans [Sec. 60] violation of any rule or regulation transaction [Sec. 60.1] promulgated by the Commission under Section 11 (on Commodity Future Contracts) or 16 (on PreNeed Plans) [Sec. 60.1] On Account of Insider Trading (a) Liability for non-disclosure

(a)Any insider who violates Subsection 27.1; (b) and any person in the case of a tender offer who violates Subsection 27.4 (a)(I), or any rule or regulation thereunder, by purchasing or selling a security while in possession of material information not generally available to the public [Sec. 61.1]

On Account of Insider Trading

(a) An insider who violates Subsection 27.3; (b) Liability for communicating OR non-public information about (b) any person in the case of a issuer tender offer who violates Subsection 27.4 (a), or any rule or regulation thereunder communicating material nonpublic information shall be jointly and severally liable under Subsection 61.1 with, and to the same extent as, the insider, or person in the case of a tender offer, to whom the communication was directed and who is liable under Subsection 61.1 by reason of his purchase or sale of a security [Sec. 61.2].

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Any investor who, contemporaneously with the purchase or sale of securities that is the subject of the violation, purchased or sold securities of the same class unless such insider, or such person in the case of a tender offer, proves that such investor knew the information or would have purchased or sold at the same price regardless of disclosure of the information to him [Sec. 61.1]

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Civil Liability Arising …

SECURITIES REGULATION CODE

Who may be liable?

Liabilities of Controlling Persons, Every person who controls any Aider and Abettor and Other person liable under this Code or Secondary Liability the rules or regulations of the Commission thereunder, shall (a) Liability of Controlling also be liable jointly and severally Persons with and to the same extent as such controlled persons to any person to whom such controlled person is liable [Sec. 51.1] NOTE: ‘Control’ may be by or through stock ownership, agency, or otherwise, or in connection with an agreement or understanding with one or more other persons [Sec. 51.1] Defense: Lack of knowledge of the existence of facts by reason of which the liability of the controlled person is alleged to exist [Sec. 51.1] 7. Liabilities of Controlling Persons, It shall be unlawful for any Aider and Abettor and Other director or officer of, or any Secondary Liability owner of any securities issued by, any issuer required to file any (b) Liability of Director/Officer for document, report or other Delay in the Filing of Required information under this Code or Documents any rule or regulation of the Commission thereunder, without just cause, to hinder, delay or obstruct the making or filing of any such document, report, or information [Sec. 51.2]

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Who may Sue?

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Civil Liability Arising …

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Who may be liable?

7. Liabilities of Controlling Persons, It shall be unlawful for any Aider and Abettor and Other person to aid, abet, counsel, Secondary Liability command, induce or procure any violation of this Code, or any rule, (c) Liability of Aider/Abettor regulation or order of the Commission thereunder [Sec. 51.3] Every person who substantially assists the act or omission of any person primarily liable under Sections 57, 58, 59 and 60 of this Code, with knowledge or in reckless disregard that such act or omission is wrongful, shall be jointly and severally liable as an aider and abettor for damages resulting from the conduct of the person primarily liable [Sec. 51.4] BUT an aider and abettor shall be liable only to the extent of his relative contribution in causing such damages in comparison to that of the person primarily liable, or the extent to which the aider and abettor was unjustly enriched thereby, whichever is greater [Sec. 51.4] NOTE: It shall be unlawful for any person, directly, or indirectly, to do any act or thing which it would be unlawful for such person to do under the provisions of this Code or any rule or regulation thereunder [Sec. 51.2]

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Who may Sue?

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The New Central Bank Act [RA No. 7653]

(3) A government-owned corporation but enjoys fiscal and administrative autonomy. [Secs. 1 & 2]

STATE POLICY

The BSP shall have a capitalization of P50B to be fully subscribed by the Government. [Sec. 2]

The State shall maintain a central monetary authority that shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit. [Sec. 1]

RESPONSIBILITY AND PRIMARY OBJECTIVE PRIMARY OBJECTIVES

SALIENT FEATURES

(1) To maintain price stability conducive to a balanced and sustainable growth of the economy. (2) To promote and maintain monetary stability and the convertibility of the peso.

(1) Assurance of BSP independence by providing for the majority of the members of the Monetary Board to come from the private sector. [Sec. 6, NCBA] (2) The BSP may now concentrate on monetary policy, and will shed itself of fiscal agency functions and its responsibilities in respect of finance companies without quasi-banking functions, which in the past, had distracted it from its primary function. [Secs. 3, 129, & 130, NCBA] (3) Provides safeguards to ensure that unlike the old Central Bank which sustained huge losses, the BSP would have a positive net income position by the following provisions: (a) Capitalization of P50B; [Sec.2, NCBA] (b) Maintenance of positive net foreign asset position; [Sec.71, NCBA] (c) Charging interests on all loans and advances to banks; [Sec. 85, NCBA] (d) Authority to collect interests on loans and advances to closed financial institutions; and (e) BSP can’t acquire shares in banking enterprise, in development banking and financing [Sec. 128, NCBA]

OTHER RESPONSIBILITIES

(1) To provide policy directions in the areas of money, banking, and credit (2) To supervise operations of banks [Sec. 3] All powers, duties and functions vested by law in the Central Bank of the Philippines not inconsistent with the NCBA shall be deemed transferred to the BSP. All references to the Central Bank of the Philippines in any law or special charters shall be deemed to refer to the BSP. [Sec. 136]

MONETARY BOARD

The body through which the powers and functions of the Bangko Sentral are exercised [Sec 6, NCBA]

POWERS AND FUNCTIONS

(1) Issue rules and regulations it considers necessary for the effective discharge of the responsibilities and exercise of the powers vested in it; (2) Direct the management, operations, and administration of Bangko Sentral, organize its personnel and issue such rules and regulations as it may deem necessary or desirable for this purpose; (3) Establish a human resource management system which governs the selection, hiring, appointment, transfer, promotion, or dismissal of all personnel;

CREATION OF THE BANGKO SENTRAL NG PILIPINAS (BSP) There is hereby established an independent central monetary authority, which shall be a body corporate known as the Bangko Sentral ng Pilipinas [Sec. 2].

NATURE OF THE BSP

(1) A central monetary authority; (2) An independent and accountable body; and PAGE 195

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(4) Adopt an annual budget for and authorize such expenditures by Bangko Sentral as are in the interest of the effective administration and operations of Bangko Sentral in accordance with applicable laws and regulations; and (5) Indemnify its members and other officials of Bangko Sentral, including personnel of the departments performing supervision and examination functions, against all costs and expenses reasonably incurred by such persons in connection with any civil or criminal action, suit or proceeding, to which any of them may be made a party by reason of the performance of his functions or duties, unless such members or other officials is found to be liable for negligence or misconduct. [Sec. 15]

(1) Direct connection with any multilateral banking or financial institution; or (2) Substantial interest in any private bank in the Philippines, within 1 year prior to his appointment [Sec. 9]

COMPOSITION

Exception: When he serves as an official representative of the government to such institution. [Sec. 9]

PROHIBITION ON MEMBERS OF THE MB

(1) To be a director, officer, employee, consultant, lawyer, agent or stockholder of any bank, quasi-bank, or any other institution which is subject to supervision or examination by the BSP; (2) To hold any other public office or public employment during their tenure; and (3) To be employed in any multilateral banking or financial institution within 2 years after the expiration of his term.

The MB shall be composed of 7 members appointed by the President with a 6-year term. [Sec. 6, NCBA]

GROUNDS FOR REMOVAL OF ANY MEMBER OF THE MB

MEMBERS

(1) The BSP Governor or his designated alternate (a deputy governor); (2) A Cabinet member to be designated by the President or his designated alternate (an Undersecretary in his department); and (3) 5 members from the private sector [Sec. 6, NCBA]

(1) If the member is subsequently disqualified under Sec. 8; (2) If he is physically or mentally incapacitated that he cannot properly discharge his duties and responsibilities and such incapacity has lasted for more than 6 months; (3) If he is guilty of acts or operations which are of fraudulent or illegal character or which are manifestly opposed to the aims and interests of the BSP; and (4) If he no longer possesses the qualifications under Sec. 8. [Sec. 10]

No member of the MB may be reappointed more than once.

QUALIFICATIONS

(1) Natural-born citizens of the Philippines; (2) At least 35 years old (the Governor must be at least 40 years old); (3) Of good moral character; (4) Of unquestionable integrity; (5) Of known probity and patriotism; and (6) With recognized competence in social and economic disciplines. [Sec. 8]

VACANCIES, HOW FILLED

Cause: death, resignation, or removal of any member Effect: a new member will be appointed to complete the unexpired period of the term of the member concerned. [Sec. 7]

DISQUALIFICATIONS

CIVIL LIABILITY OF MEMBERS OF THE MB

In addition to the disqualifications under the Code of Conduct and Ethical Standards for Public Officials and Employees (RA 6713), a member of the Monetary Board is disqualified:

Members of the MB, officials, examiners, and employees of the BSP are liable when: PAGE 196

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(1) They willfully violate the provisions of the NCBA; (2) They are guilty of negligence, abuses or acts of malfeasance or misfeasance; or (3) Fail to exercise extraordinary diligence in the performance of his duties. [Sec. 16]

MERCANTILE LAW

(2) When, on the basis of the report of the conservator or of its own findings, the MB determines that the continuance in business of the institution would involve probable loss to its depositors or creditors (the bank or quasi-bank would then be placed under receivership) [Sec. 29]

HOW THE BSP HANDLES BANKS IN DISTRESS

EFFECTS OF CONSERVATORSHIP

Liquidity – Ability of an asset to be converted into cash. An entity is liquid when it is able to pay its liabilities when they fall due.

(1) Bank/Quasi-bank retains juridical personality (2) Not a precondition to the designation of a receiver, and; (3) Perfected transactions cannot be repudiated

Solvency – When current assets are more than current liabilities, providing the ability to pay debts. An entity is solvent when it is able to meet its long term obligations/liabilities.

QUALIFICATIONS OF A CONSERVATOR

 The conservator should be competent and knowledgeable in bank operations and management. [Sec. 29]  The appointment of a conservator shall be vested exclusively in the MB. [Sec. 30]

Insolvency – When the actual market value of assets are insufficient to pay its liabilities, not considering capital stock and surplus which are not liabilities for such purpose. An entity is insolvent when it is unable to meet current and long-term obligations.

POWERS AND DUTIES OF A CONSERVATOR

(1) To take charge of the assets, liabilities, and the management thereof (2) To reorganize the management (3) To collect all monies and debts due said institution, and (4) To exercise all powers necessary to restore its viability (5) To report and be responsible to the MB (6) To overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank. [Sec. 29]

CONSERVATORSHIP GROUNDS FOR APPOINTMENT OF A CONSERVATOR

Whenever, on the basis of a report submitted by the appropriate supervising or examining department, the MB finds that a bank or quasibank is: (1) In a state of continuing inability; or (2) Unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors [Sec. 29]

While the Central Bank law gives vast and far reaching powers to the conservator of a bank, such powers must be related to the preservation of the assets of the bank, the reorganization of the management and the restoration of viability. Such powers cannot extend to the post-facto repudiation of perfected transactions, otherwise they would infringe against the non-impairment clause of the Constitution. [First Philippine International Bank v. CA, 1996]

DURATION

Period: shall not exceed 1 year [Sec. 29] The expenses attendant to the conservatorship shall be borne by the bank or quasi-bank concerned [Sec. 29]

GROUNDS FOR TERMINATION OF CONSERVATORSHIP BY MB

(1) When it is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary PAGE 197

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(4) Not to pay or commit any act that will involve the transfer or disposition of any asset of the institution, except: (a) Administrative expenditures (b) Receiver may deposit or place funds in non-speculative investments (5) Subject to prior approval of the MB, determine, as soon as possible, but not later than 90 days from take-over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public.

REMUNERATION General Rule: The conservator shall receive remuneration in an amount not to exceed 2/3 of the salary of the president of the institution in 1 year, payable in 12 equal monthly payments. Exception: A conservator connected with the BSP, in which case said conservator shall not be entitled to receive any remuneration or emolument. [Sec. 29]

RECEIVERSHIP Grounds

Whenever the MB finds that a bank or quasibank: (1) Is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community; (2) Has insufficient realizable assets, as determined by the BSP, to meet its liabilities; or (3) Cannot continue in business without involving probable losses to its depositors or creditors; or (4) Has willfully violated a cease-and-desist order under Sec. 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution [Sec. 30]

The assets of the institution under receivership and liquidation shall be deemed in custodia legis and shall be exempt from any order of garnishment, levy, attachment, or execution. CLOSE NOW, HEAR LATER SCHEME Sec. 29 of the Central Bank Act does NOT contemplate prior notice and hearing before a bank may be directed to stop operations and placed under receivership. It is enough that such action is made subject of a subsequent judicial review. When the law provides for the filing of a case within 10 days after the receiver takes charge of the assets of the bank, it is unmistakable that the assailed actions should precede the filing of the case. The legislature could not have intended to authorize “no prior notice and hearing” in the bank’s closure and at the same time allow a suit to annul it on the basis of absence thereof [Central Bank vs. CA GR No. 76118, March 30, 1993]

RECEIVER

(1) If a banking institution: the PDIC (2) If a quasi-bank: any person of recognized competence in banking or finance

LIQUIDATION

Should the determination be that the institution cannot be rehabilitated or permitted to resume business, the MB shall notify in writing the board of directors of the institution of its findings and direct the receiver to proceed with the liquidation of the institution.

The appointment of a receiver shall be vested exclusively in the MB. And the designation of a conservator is not a precondition to the designation of a receiver. POWERS AND DUTIES OF A RECEIVER (1) Immediately gather and take charge of all the assets and liabilities of the institution (2) Administer the assets for the benefit of the creditors (3) Exercise the general powers of a receiver under the Revised Rules of Court

PROCEDURE (1) The receiver shall file ex parte with the proper RTC, and without requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to the liquidation plan adopted by the PDIC

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(if quasi-bank, liquidation plan adopted by the MB) (2) Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, (a) Adjudicate disputed claims against the institution, (b) Assist the enforcement of individual liabilities of the stockholders, directors, and officers, and (c) Decide on other issues as may be material to implement the liquidation plan (3) The receiver shall convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code

MERCANTILE LAW

(4) Stay of execution of judgment to prevent depletion of bank assets (5) Bank is not liable to pay interest on deposits which accrued during the period of suspension of operation (6) Restriction of bank’s capacity to do new business (new loans, deposits) but with obligation to collect pre-existing debts

HOW THE BSP EXCHANGE CRISIS

HANDLES

LEGAL TENDER POWER

All notes and coins issued by the BSP shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private.

The assets of the institution under receivership and liquidation shall be deemed in custodia legis and shall be exempt from any order of garnishment, levy, attachment, or execution.

Limitation: Coins shall be legal tender in amounts not exceeding P50 for denominations of 25 centavos and above, and in amounts not exceeding P20 for denominations of 10 centavos or less unless otherwise fixed by the MB.

DISPOSITIONS  In case of a liquidation of a bank or quasibank, after payment of the cost of proceedings, including reasonable expenses and fees of the receiver to be allowed by the court, the receiver shall pay the debts of such institution, under order of the court, in accordance with the rules on concurrence and preference of credit in the Civil Code. [Sec. 31]  All revenues and earnings realized by the receiver in winding up the affairs and administering the assets of any bank or quasibank shall be used to pay the costs of proceedings, salaries of such personnel whose employment is rendered necessary in the discharge of the liquidation together with other additional expenses caused thereby. The balance of revenues and earnings, after the payment of all said expenses, shall form part of the assets available to creditors. [Sec. 32]

The maximum amount of coins to be considered as legal tender is: [BSP Circular 537 (2006)] (1) P1,000.00 for denominations of 1-Piso, 5Piso and 10-Piso coins; and (2) P100.00 for denominations of 1-sentimo, 5sentimo, 10-sentimo, and 25-sentimo coins. [Sec. 52]

RATES OF EXCHANGE

The MB shall: (1) Determine the exchange rate policy of the country; (2) Determine the rates at which the Bangko Sentral shall buy and sell spot exchange; (3) Establish deviation limits from the effective exchange rate or rates as it may deem proper. (4) Determine the rates for other types of foreign exchange transactions by the BSP, including purchases and sales of foreign notes and coins.

EFFECTS OF APPOINTMENT OF RECEIVER/LIQUIDATION (1) Retention of juridical personality (2) Suspension of operations/ Stoppage of business (3) Assets are deemed in custodial legis, i.e., exempt from garnishment, levy or execution

Limitation: The margins between the effective exchange rates and the rates established by the MB may not exceed the corresponding margins PAGE 199

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for spot exchange transactions by more than the additional costs or expenses involved in each type of transactions. [Sec. 74]

Law on Secrecy of Bank Deposits [RA No. 1405, as amended] POLICY (1) To give encouragement to the people to deposit their money in banking institutions; and (2) To discourage private hoarding. [Sec. 1]

PURPOSE

 That money may be properly utilized by banks in authorized loans to assist in the economic development of the country. [Sec. 1]  The absolute confidentiality rule in R.A. No. 1405 actually aims at protection from unwarranted inquiry or investigation if the purpose of such inquiry or investigation is merely to determine the existence and nature, as well as the amount of the deposit in any given bank account. [China Banking Corporation v. Ortega, 1973]

PROHIBITED ACTS (1) No person, government official, bureau or office may examine, inquire into or look into such deposits. [Sec. 2] (2) No official or employee of any banking institution may disclose to any unauthorized person any information concerning said deposits. [Sec. 3]

DEPOSITS COVERED

 All deposits of whatever nature with banks or banking institutions in the Philippines are considered as of an absolutely confidential nature. [Sec. 2]  Investment in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are included. [Sec. 2]  The confidentiality of foreign-currency deposits is governed by the Foreign Currency Deposit Act. PAGE 200

MERCANTILE LAW

 Money-market placement is not covered by RA 1405 because it is not deposited in the bank. Of Whatever Nature  The term deposits as used in RA 1405 is to be understood broadly and not limited only to accounts which give rise to a creditor-debtor relationship between the depositor and the bank.  If the money deposited under an account may be used by banks for authorized loans to third persons, then such account, regardless of whether it creates a creditor-debtor relationship between the depositor and the bank, falls under the category of accounts which the law precisely seeks to protect for the purpose of boosting the economic development of the country.  Considering the use of the phrase “of whatever nature” RA 1405 applies not only to money which is deposited but also to those which are invested. Thus, the protection afforded by RA 1405 extends to trust accounts. [Ejercito v. Sandiganbayan [2006], Special Division]  Indeed, by force of statute, all bank deposits are absolutely confidential, and that nature is unaltered even by the legislated exceptions…There is disfavor towards construing these exceptions in such a manner that would authorize unlimited discretion on the part of the government or of any party seeking to enforce those exceptions and inquire into bank deposits. If there are doubts in upholding the absolutely confidential nature of bank deposits against affirming the authority to inquire into such accounts, then such doubts must be resolved in favor of the former. [Republic v. Eugenio, 2008]

ZONES OF PRIVACY

 Under the RA 1405, bank deposits are statutorily protected or recognized zones of privacy. [People v. Estrada, G.R. No. 164368, April 2, 2009; Marquez v. Desierto, G.R. No. 135882, June 27, 2001, 359 SCRA 772; Ople v. Torres, G.R. No. 107737. October 1, 1999, 316 SCRA 43]  It is conceded that while the fundamental law has not bothered with the triviality of

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specifically addressing privacy rights relative to banking accounts, there, nevertheless, exists in our jurisdiction a legitimate expectation of privacy governing such accounts. The source of this right of expectation is statutory, and it is found in R.A. No. 1405, otherwise known as the Bank Secrecy Act of 1955. [BSB Group, Inc., v. Go, 2010]

MERCANTILE LAW

(d) In cases where the money deposited or invested is the subject matter of litigation  By the phrase ‘subject matter of the action’ is meant ‘the physical facts, the things real or personal, the money, lands, chattels, and the like, in relation to which the suit is prosecuted, and not the delict or wrong committed by the defendant.’ [Mathay v. Consolidated Bank and Trust Company, 1974]  We note with approval the difference between the ‘subject of the action’ from the ‘cause of action.’ We also find petitioner's definition of the phrase ‘subject matter of the action’ is consistent with the term ‘subject matter of the litigation,’ as the latter is used in the Bank Deposits Secrecy Act.  Where the plaintiff is fishing for information so it can determine the culpability of private respondent and the amount of damages it can recover from the latter. It does not seek recovery of the very money contained in the deposit. The subject matter of the dispute may be the amount of P999,000.00 that petitioner seeks from private respondent as a result of the latter's alleged failure to inform the former of the discrepancy; but it is not the P999,000.00 deposited in the drawer's account. By the terms of R.A. No. 1405, the ‘money deposited’ itself should be the subject matter of the litigation. [Union Bank v. Court of Appeals, 1999]  The exception even extends to cases of concealment of illegally acquired property not involving anti-graft cases as long as money deposited was the subject matter of litigation. [Mellon Bank, N.A. v. Magsino, 1990]

Exceptions [Sec. 2]: (1) Upon written permission of the depositor (2) In cases of impeachment (3) Upon order of competent court in the following cases: (a) Bribery [Sec. 2] (b) Dereliction of duty of public officials [Sec. 2] (c) Unexplained wealth under Sec. 8 of RA 3019 or the Anti-Graft and Corrupt Practices Act [PNB v. Gancayco, 1965; Banco Filipino v. Purisima, 1988; Marquez v. Desierto, 2001]  The exception applies to cases of concealment of illegally acquired property in anti-graft cases. The inquiry into illegally acquired property – or property NOT "legitimately acquired" – extends to cases where such property is concealed by being held by or recorded in the name of other persons. [Banco Filipino v. Purisima, 1988] (d) Those under the Anti-Money Laundering Act of 2001 [RA 9160, hereinafter “AMLA”], when there is probable cause that the deposits or investments involved are in any way related to an unlawful activity or a money laundering offense, except that no court order is required if: (i) Funds or property involved consists of investments; or (ii) Said investments are related to:  Kidnapping for ransom;  Unlawful activities under Comprehensive Drugs Act of 2002 [RA 9165];  Hijacking and other violations under RA 6235; and  Destructive arson and murder, including those perpetrated by terrorists against non-combatants and similar targets.

Other exceptions: (1) When inquiry is conducted under the authority of the Commissioner of Internal Revenue into the bank accounts of the following: (a) A decedent in order to determine his gross estate (b) Any taxpayer who has filed an application for compromise of his tax liability, which application shall include a written waiver

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of his privilege under RA 1405 or under other general or special laws Information obtained from banks and financial institutions may be furnished to a foreign tax authority pursuant to an existing convention or agreement. [Sec. 6(F), NIRC, as amended by RA 10021] (2) BSP inquiry or examination in the course of its periodic or special examination of the bank [Sec. 11, AMLA] (3) Disclosure of certain information about bank deposits which have been dormant for at least 10 years, to the Treasurer of the Philippine in a sworn statement, a copy of which is posted in the bank premises [Sec. 2, Unclaimed Balances Law (Act No. 3926, as amended)] (4) The PDIC and/or the BSP can inquire into or examine deposit accounts and all information related thereto in case there is a finding of unsafe and unsound banking practice [Sec. 8, paragraph 8, R.A. 3591, as amended by R.A. 9576]. (5) The Secretary of Justice in his Opinion No. 13 s. 1987 concluded that the Presidential Commission on Good Government can compel banks to disclose or produce bank records without violating the bank secrecy laws. [Morales, The Philippine General Banking Law] NOT an exception:  Power of the Ombudsman to “examine and have access to bank accounts and records” under Sec. 15(8) of RA 6770 [Morales, The Philippine General Banking Law]  The SC in Marquez v. Desierto [G.R. No.135882, June 27, 2001] and Ombudsman v. Ibay [G.R. No. 137538, September 3, 2001] restricted the Ombudsman’s power as follows: “[B]efore an in camera inspection may be allowed, there must be a pending case before a court of competent jurisdiction. Further, the account must be clearly identified, the inspection limited to the subject matter of the pending case before the court of competent jurisdiction. The bank personnel and the account holder must be notified to be present during the inspection, and such inspection may cover only the account identified in the pending case.” PAGE 202

MERCANTILE LAW

GARNISHMENT OF DEPOSITS General Rule: The prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. [China Banking Corporation v. Ortega, 1973; Philippine Commercial and Industrial Bank v. Court of Appeals, 1991] “…the prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real inquiry in such a case, and if the existence of the deposit is disclosed the disclosure is purely incidental to the execution process. It is hard to conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a bank.” [China Banking Corporation v. Ortega, 1973] Exception: Foreign Currency Deposits  The foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. [Sec. 8, Foreign Currency Deposit Act]  However, in Salvacion vs. CB (1997), where a Filipino child was raped by a foreigner, the SC allowed, pro hac vice, garnishment of foreign currency deposits stating: “If we rule that the questioned Section 113 of CB Circular No. 960 which exempts from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever, is applicable to a foreign transient, injustice would result especially to a citizen aggrieved by a foreign guest.”

CONFIDENTIALITY OF FOREIGN CURRENCY DEPOSITS General Rule: Foreign currency deposits are confidential.

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Exceptions: (1) Upon written permission of the depositor [Sec. 8, Foreign Currency Deposit Act; Intengan vs CA; 2002] (2) Upon order of a competent court in cases of violation of the Anti-Money Laundering Act of 2001 (3) During Bangko Sentral’s periodic or special examinations, and (4) Disclosure of the Treasurer of the Philippines when the unclaimed balances law applies [Act 3936, as amended by PD 679] (5) BSP/PDIC inquiry if there is a finding of unsafe and unsound banking practice

MERCANTILE LAW

(5) Cooperative Banks (6) Islamic Banks (7) Other classification of banks as may be determined by the Monetary Board of the BSP (1) UNIVERSAL BANKS (2) COMMERCIAL BANKS (3) THRIFT BANKS - The term ‘thrift banks’ also refers to any banking corporation organized for the following purposes: (a) Accumulating the savings of depositors and investing them, together with capital loans secured by bonds, mortgages in real estate and insured improvements thereon, chattel mortgage, bonds and other forms of security or in loans for personal or household finance, whether secured or unsecured, or in financing for homebuilding and home development; in readily marketable and debt securities; in commercial papers and accounts receivables, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; and in such other investments and loans which the Monetary Board may determine as necessary in the furtherance of national economic objectives; (b) Providing short-term working capital, medium- and long-term financing, to businesses engaged in agriculture, services, industry and housing; and (c) Providing diversified financial and allied services for its chosen market and constituencies especially for small and medium enterprises and individuals. [Sec.3(a), R.A. 7906]

PENALTIES

(1) Imprisonment of not more than 5 years; or (2) Fine of not more than twenty thousand pesos; or (3) Both, in the discretion of the court [Sec. 5]

General Banking Law of 2000 [R.A. No. 8791] POLICY

To promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy. [Sec. 2]

DEFINITION AND CLASSIFICATION OF BANKS

Bank – entities engaged in the lending of funds obtained in the form of deposits [Sec. 3.1]

(4) RURAL BANKS These banks are mandated to make needed credit available and readily accessible in the rural areas on reasonable terms and which are primarily governed by the Rural Banks Act of 1992 (RA 7353].

CORE BANKING FUNCTIONS:

(1) Taking of deposits from the public (2) Lending out these funds [Morales, The Philippine General Banking Law]

CLASSIFICATION OF BANKS [SEC.

3.2]

(5) COOPERATIVE BANKS A cooperative bank is one organized for the primary purpose of providing a wide range of financial services to cooperatives and their members. [Art. 23(i), R.A. 9520] It may perform any or all of the services offered by a rural bank, including the operation of an

(1) Universal Banks (UB) (2) Commercial Banks (KB) (3) Thrift Banks (a) Savings and mortgage banks (b) Stock savings and loan associations (c) Private development banks (4) Rural Banks PAGE 203

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FCDU subject to certain conditions. [Morales, The Philippine General Banking Law] (6) ISLAMIC BANKS These are banks the business dealings and activities of which are subject to the basic principles and rulings of Islamic Shari’a. The Al Amanah Islamic Investment Bank of the Philippines, created by RA 6848, is the only Islamic bank in the country at this time.

MERCANTILE LAW

BANK POWERS LIABILITIES

AND

Powers UB

(7) OTHER CLASSIFICATION OF BANKS AS MAY BE DETERMINED BY THE MONETARY BOARD OF THE BSP e.g., Philippine Veterans Bank [RA 3518], Landbank of the Philippines [RA 3844], Development Bank of the Philippines [RA 85]

DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST ENTITIES

KB

(1) Corporate Powers (1) Corporate Powers (2) Banking and (2) Banking and Incidental Powers Incidental Powers (3) Powers of an [Sec. 29] investment house (3) Power to invest in (4) Power to invest in allied enterprises non-allied [Sec. 30] enterprises [Sec. 23] (5) Power to invest in allied enterprises [Sec. 24]

CORPORATE

POWERS

CORPORATION CODE]

Quasi-banks – entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of relending or purchasing receivables and other obligations. [Sec. 4, last paragraph] Deposit substitutes – funds obtained from the public, other than deposits, through the issuance, endorsement, or acceptance of deposit-substitute instruments for the borrower's own account, for the purpose of relending or purchasing of receivables and other obligations. It includes bankers acceptances, promissory notes, participations, certificates of assignment and similar instruments with recourse, and repurchase agreements. [Sec. 95, New Central Bank Act] Trust Entities – a stock corporation or a person duly authorized by the Monetary Board to engage in trust business. [Sec. 79] Trust Business - any activity resulting from trusteeship involving the appointment of a trustee by a trustor for the administration, holding, management of funds and/or properties of the trustor by the trustee for the use, benefit or advantage of the trustor or of beneficiaries. PAGE 204

[SEC.

36,

(1) To sue and be sued in its corporate name; (2) Succession by its corporate name for the period stated in the AOI and the certificate of incorporation (3) To adopt and use a corporate seal (4) To amend its AOI (5) To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal them (6) To issue or sell stocks to subscribers and to sell treasury stocks. (7) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution (8) To enter into merger or consolidation (9) To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: provided that no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity (10) To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees

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(11) To exercise such other powers as may be essential or necessary to carry out its purposes as stated in the AOI.

BANKING AND INCIDENTAL POWERS

All such powers as may be necessary to carry on the business of commercial banking [Sec. 29] (1) Accepting drafts (2) Issuing letters of credit (3) Discounting and negotiating promissory notes, drafts, bills of exchange, and other evidence of debt (4) Accepting or creating demand deposits (5) Receiving other types of deposits and deposit substitutes (6) Buying and selling foreign exchange and gold or silver bullion (7) Acquiring marketable bonds and other debt securities (8) Extending credit (1) ACCEPTING DRAFTS By accepting a draft, a bank creates a “banker’s acceptance”, which is a negotiable time draft or bill of exchange drawn on and accepted by a commercial bank. This is different from “trade acceptance”, which is accepted by the buyer. [Morales, The Philippine General Banking Law) (2) ISSUING LETTERS OF CREDIT (3) DISCOUNTING AND NEGOTIATING PROMISSORY NOTES, DRAFTS, BILLS OF EXCHANGE, AND OTHER EVIDENCE OF DEBT (4) ACCEPTING OR CREATING DEMAND DEPOSITS General Rule: Only a Universal Bank (UB) Commercial Bank (KB) can accept or create demand deposits Exception: Banks other than a UB or KB with prior approval of, and subject to such conditions and rules as may be prescribed by the Monetary Board [Sec. 33, GBL] Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan. [Art. 1980, NCC]

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Presumption of ownership of deposits  It is presumed that money deposited in a bank account belongs to the person in whose name the deposit account is opened.  A depositor is presumed to be the owner of funds standing in his name in a bank deposit; and where a bank is not chargeable with notice that the money deposited in such account is the property of some other person than the depositor, the bank is justified in paying out the money to the depositor or upon his order, and cannot be liable to any other person as the true owner. [Fultron Iron Works Co. v. China Banking Corporation, 1930] No duty to set-off A bank is under no duty or obligation to make an application or set-off against the deposit accounts of a borrower. To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank has the option (but not the obligation) to exercise. [BPI v. CA, 1994] Safety deposit boxes The rent of safety deposit boxes is a special kind of deposit and cannot be characterized as an ordinary contract of lease because the full and absolute possession and control of the deposit box is not given to the renters. The prevailing rule is that the relation between the bank renting out and the renter is that of bailor and bailee the bailment being for hire and mutual benefit. [CA Agro-industrial Dev. Corp. v. CA, 1983] (5) RECEIVING OTHER TYPES OF DEPOSITS AND DEPOSIT SUBSTITUTES Types of Deposits: 1. Time Deposit - Interest rate stipulated depending on the number of days. During this period, the money deposited may not be withdrawn without incurring penalty. High interest rates. 2. Savings Deposit - Bank pays an interest rate, but not as high as time deposits. 3. Demand Deposits/Current Accounts - No interest is paid by the bank because the depositor can take out his funds any time. It is called demand deposit because the depositor can withdraw the money he deposited on the very same day when he

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deposited it or at any time thereafter. [VILLANUEVA, Commercial Law Review] 4. Negotiable Order of Withdrawal Accounts – Interest-bearing deposit accounts that combine the payable on demand feature of checks and investment feature of savings accounts [Sec. X223, Manual of Regulations for Banks]

MERCANTILE LAW

b) Shall have the right to demand immediate repayment or liquidation of the obligation [Sec. 40]

(6) BUYING AND SELLING FOREIGN EXCHANGE AND GOLD OR SILVER BULLION (7) ACQUIRING MARKETABLE BONDS AND OTHER DEBT SECURITIES (8) EXTENDING CREDIT “Know your customer” rule Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling its commitments to the bank. [Sec. 40] The bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditure and such information as may be prescribed by law or by rules and regulations of MB to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the BIR. [Sec. 40] Credit enhancement If the borrower is less than creditworthy, third persons may enhance his credit by providing guarantees and other security devices in favor of the bank. [Morales, The Philippine General Banking Law, opinion]

Limit on loans, credit accommodations and guarantees General rule: Shall not exceed 75% of the appraised value of the respective real estate security, plus 60% of the appraised value of the insured Against Real improvements, and such loans estate may be made to the owner of the real estate or to his assignees Exception: The Monetary Board otherwise prescribes [Sec. 37] General rule: Shall not exceed On security of 75% of the appraised value of chattels and the security, and such loans intangible and other credit properties accommodations may be (patents, made to the title-holder of the trademarks, chattels and intangible trade names, properties or his assignees and Exception: The Monetary Board copyrights) otherwise prescribes [Sec. 38] Grant of loans a) Only in amounts and for the periods of time essential for the effective completion of the operations to be financed; and b) Consistent with safe and sound banking practices. [Sec. 39] Purpose of loans The purpose shall be stated in the application and in the contract between the bank and the borrower. [Sec. 39] Effect of usage of loan proceeds for purposes other than those agreed upon with the bank The bank shall have the right to terminate the loan or other credit accommodation and demand immediate repayment of the obligation. [Sec. 39]

A bank cannot lend pesos to a non-resident [BSP Circular No. 22; Sec. 22, Manual of Regulations on Foreign Exchange Transactions]. [Morales, The Philippine General Banking Law] Material misrepresentation If there is material misrepresentation, the bank— a) May terminate any loan or other credit accommodation granted on the basis of said statements; and

Amortization on loans and other credit accommodations a) In case of loans and other credit accommodations with maturities of more than 5 years, provisions must be made for periodic amortization payments, but such payments must be made at least annually: PAGE 206

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Provided, however, That when the borrowed funds are to be used for purposes which do not initially produce revenues adequate for regular amortization payments therefrom, the bank may permit the initial amortization payment to be deferred until such time as said revenues are sufficient for such purpose, but in no case shall the initial amortization date be later than 5 years from the date on which the loan or other credit accommodation is granted. b) In case of loans and other credit accommodations to microfinance sectors, the schedule of loan amortization shall take into consideration the projected cash flow of the borrower and adopt this into the terms and conditions formulated by banks. [Sec. 44]

(b) Under Sec. 2, the degree of diligence is “high standards of integrity and performance” and no longer “highest degree of diligence” as was decided prior to the effectivity of the General Banking Law of 2000 but also (mistakenly) even thereafter. In numerous cases, the Supreme Court has held that the highest degree of diligence and care is expected from banks [Simex International v. CA (1990); Philippine Bank of Commerce v. CA (1997); Westmont Bank v. Ong (2002); Solidbank v. Spouses Tan (2003); Samsung Construction v. FEBTC (2004); Citibank, N.A. v. Spouses Cabamongan (2006); Philippine Savings Bank v. Chowking Food Corporation (2008); Bank of America NT &SA v. Philippine Racing Club (2009)].  As a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.  In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the failure to duly credit him his deposits as soon as they are made, can cause the depositor not a little embarrassment if not financial loss and perhaps even civil and criminal litigation [Simex International v. CA, 1990].  This fiduciary relationship means that the bank’s obligation to observe “high standards of integrity and performance” is deemed written into every deposit agreement between a bank and its depositor [Philippine Banking Corporation vs. CA, G.R. No. 127469, January 15, 2004].  Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees [PCI Bank v. CA, 2001].

All are subject to such rules as the Monetary Board may promulgate. [Sec. 29, GBL]

DILIGENCE BANKS

REQUIRED

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OF

 Banks assume a degree of diligence higher than that of a good father of a family. Its fiduciary duty imposes upon it a higher level of accountability than that expected of a depositor. [Philippine Banking Corporation vs. CA, G.R. No. 127469, January 15, 2004]  The General Banking Law of 2000 requires of banks the highest standards of integrity and performance. The banking business is impressed with public interest. Of paramount importance is the trust and confidence of the public in general in the banking industry. Consequently, the diligence required of banks is more than that of a Roman pater familias or a good father of a family. The highest degree of diligence is expected. [Philippine Commercial Bank vs. Balmaceda, G.R. No. 158143, September 21, 2011]  Notwithstanding the degree of diligence required, a bank is not expected to be infallible [Prudential Bank vs. CA, 2000].

FIDUCIARY DUTY

(a) Failure on the part of the bank to satisfy the degree of diligence required of banks may warrant the award of damages.

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 It cannot be over emphasized that the banking business is impressed with public interest. Of paramount importance is the trust and confidence of the public in general in the banking industry. Consequently, the diligence required of banks is more than that of a Roman pater familias or a good father of a family. The highest degree of diligence is expected [Phil. Savings Bank v. Chowking Food Corporation, 2008].  The banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount importance such that the appropriate standard of diligence must be a high degree of diligence, if not the utmost diligence [Bank of America NT&SA v. Phil. Racing Club, 2009].  Under the doctrine of last clear chance, a bank may be held liable for loss despite the negligence of a depositor. Examples of these cases are the following: (a) For disbursing funds to a dishonest employee despite the employee’s failure to strictly abide with the bank’s internal procedure. [PBC v. CA, 1997] (b) Allowing the execution of a mortgage on parcels of land as security for a loan not owned by the prospective borrower. [Canlas v. Court of Appeals, 2000] (c) Crediting the deposit in favor of another depositor, a check where the signature of the drawer was forged. [Westmont Bank v. Ong, 2002]

NATURE OF BANK FUNDS AND BANK DEPOSITS

 The relationship between a depositor and a bank is that of a creditor and debtor in relation to the bank’s deposit functions [Gullas vs. PNB, G.R. No. L-43191, November 13, 1935] and not that of depositor and depositary.  The contract between the bank and its depositor is governed by the provisions of the NCC on simple loan [Consolidated Bank and Trust Corporation vs. CA, G.R. No. 138569, September 11, 2003].  Bank deposits are in the nature of irregular deposits [Serrano vs. Central Bank, G.R. No. L30511, February 14, 1980]. Therefore, Art. 1287 of the Civil Code, which prohibits

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compensation when one of the debts arises from depositum, does not apply.  Current and savings deposits are loans to a bank because the bank can use the same and they earn interest [BPI vs. CA, G.R. No. 104612, May 10, 1994].  The relationship being contractual in nature, mandamus is therefore NOT an available remedy since mandamus does not lie to enforce the performance of contractual obligations [Maclaring Lucman vs. Alimatar Malawi, G.R. No. 159794, December 19, 2006]  Money deposited is commingled with other money constituting a common fund.

STIPULATION ON INTERESTS

 The Monetary Board may prescribe the maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations.  Any change by the Board in the maximum maturities shall apply only to loans and other credit accommodations made after the date of such action.  The Monetary Board shall regulate the interest imposed on micro finance borrowers by lending investors and similar lenders such as, but not limited to, the unconscionable rates of interest collected on salary loans and similar credit accommodations [Sec. 43]

GRANT OF LOANS AND SECURITY REQUIREMENTS (PRUDENTIAL MEASURES) RATIO OF NET WORTH TO TOTAL RISK ASSETS

The minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts [i.e. net worth: total risk assets] [Sec. 34] General Rule: A bank must conform to the riskbased capital ratio prescribed by the MB Exceptions: The MB may alter or suspend compliance with such ratio whenever necessary for a maximum period of 1 year. (1) In case of a bank merger or consolidation; OR

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(2) When a bank is under rehabilitation under a program approved by the BSP; [Sec. 34]

MERCANTILE LAW

other similar documents transferring or securing title; (2) Covering readily marketable, non-perishable goods; and (3) Which must be fully covered by insurance [Sec. 35.2]

PURPOSE A bank must not be allowed to expand the volume of its loans and investments in a manner that is disproportionate to its net worth. [Morales, The Philippine General Banking Law]

PURPOSE To prevent the bank from making excessive loans and other credit accommodations to a single borrower or corporate group, including guarantees for the account of such borrower or group. The bank is prohibited from… placing many eggs in the basket of one client. [It] is a damage-control mechanism [and] a device for risk amelioration. [Morales, The Philippine General Banking Law]

EFFECT OF NON-COMPLIANCE (1) The MB may limit or prohibit the distribution of net profits by such bank and may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met. (2) The MB may restrict or prohibit the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable evidences of indebtedness of the RP and the BSP and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the RP, until the minimum required capital ratio has been restored. (Sec. 34, GBL)

BASIS FOR DETERMINING COMPLIANCE The basis for determining compliance with the SBL is the total credit commitment of the bank to the borrower. [Sec. 35.1]

SINGLE BORROWER’S LIMIT

General Rule: The total loans, credit accommodations and guarantees that may be extended by a bank to any person, partnership, association, or corporation or other entity shall at no time exceed 20% of the net worth of such bank. [Sec. 35.1] Exceptions: (1) The Monetary Board otherwise prescribes for reasons of national interest. [Sec. 35.1] Now, the single borrower’s limit is 25% of the net worth of the lending bank. (2) Wholesale lending activities of government banks to participating institutions for relending to end-user borrowers: separate limit of 35% net worth. [BSP Circular No. 425 dated March 25, 2004] INCREASE OF LIMIT The Monetary Board may increase the limit prescribed by an additional 10% of the net worth, when: (1) The additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or PAGE 209

INCLUSIONS IN THE CEILING (1) The direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general indorser, drawer or guarantor who obtains a loan or other credit accommodation from or discounts paper with or sells papers to such bank; (2) In the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of said entities to such bank; (3) In the case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and (4) In the case of a partnership, association or other entity, the liabilities of the members thereof to such bank. [Sec. 35.3] GUIDELINES ON THE WHOLESALE LENDING OF GOVERNMENT BANKS (1) It shall apply only to loans granted by participating financial institutions (PFIs) on a wholesale basis for on-lending to end-user borrowers; (2) It shall apply only to loan programs funded by multilateral, international, or local development agencies, organizations, or institutions, especially designed for

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wholesale lending activities of government banks; (3) The end-user borrowers of the PFIs shall be subject to the 25% SBL, not the increased ceiling of 35%; and (4) Government banks shall observe appropriate criteria for accrediting PFIs and for the grant/renewal of credit lines to accredited PFIs. [BSP Circular No. 425 dated March 25, 2004]

MERCANTILE LAW

RESTRICTIONS ON BANK EXPOSURE TO DOSRI (DIRECTORS, OFFICERS, STOCKHOLDERS, AND THEIR RELATED INTERESTS) General Rule: No director or officer of any bank— (1) Shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank, nor (2) Shall he become a guarantor, endorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank

EXCLUSIONS FROM THE CEILING (NONRISK LOANS) Loans and other credit accommodations— (1) Secured by obligations of the BSP or of the Philippine Government; (2) Fully guaranteed by the government as to the payment of principal and interest; (3) Covered by assignment of deposits maintained in the lending bank and held in the Philippines; (4) Under letters of credits to the extent covered by margin deposits; and (5) Specified by the Monetary Board as non-risk items [Sec. 35.5]

Exceptions: (1) Valid insider lending [Sec. 36] (2) Loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders [Sec. 36] REQUIREMENTS FOR VALID INSIDER LENDING (1) In the regular course of business; (2) Upon terms not less favorable to the bank than those offered to others; (3) There is a written approval of the majority of all the directors of the bank, excluding the director concerned (Except: granted to officers under a fringe benefit plan approved by the BSP); (4) The required approval shall be entered upon the record of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the BSP; (5) Limited to an amount equivalent to the DOSRI borrower’s unencumbered deposits and book value of his paid-in capital contribution in the bank [Sec. 36]

COMBINATION OF LIABILITIES The MB may prescribe the combination of the liabilities of subsidiary corporations or members of the partnership, association, entity or such individual under certain circumstances, including but not limited to any of the following situations: (1) The parent-corporation, partnership, association, entity or individual guarantees the repayment of the liabilities; (2) The liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the partnership or association or entity or such individual; or (3) The subsidiaries though separate entities operate merely as departments or divisions of a single entity. [Sec. 35.4, GBL]

Exceptions: (1) Non-risk items; and (2) Loans in the form of fringe benefits.

Loans and other credit accommodations, deposits maintained with, and usual guarantees by a bank to any other bank or non-bank entity, whether locally or abroad, shall be subject to the prescribed limits. [Sec. 35.6]

A DOSRI borrower is required to waive the secrecy of his “deposits of whatever nature in all banks in the Philippines.” [Sec. 26, NCBA] PURPOSE The general policy behind DOSRI rules is to level the lending field between the “insiders” PAGE 210

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and the “outsiders”. The objective is to prevent the bank from becoming a captive source of finance for DOSRI. [Morales, The Philippine General Banking Law]

MERCANTILE LAW

UNIFIED RESERVE (1) Statutory or legal and liquidity reserve [N.B. The two reserves have been combined or unified: 18% for deposits and deposit substitutes] [BSP Circular No. 753 dated March 29, 2012] (a) For deposit-substitutes evidenced by repurchase agreements covering government securities: 2% [BSP Circular No. 444 dated August 18, 2004] (b) For foreign currency deposit units: 100% [BSP Circular No. 1389 dated April 13, 1993, as amended]; 30% of this cover must be in the form of liquid assets [BSP CircularLetter dated June 6, 1997, as cited in Morales] (2) Reserve: The required reserves are to be kept in the form of deposits placed in the banks’ Demand Deposit Account with the BSP [BSP Circular No. 753 dated March 29, 2012]

LOAN-LOSS PROVISIONING

The following are subject to regulation by the Monetary Board: (1) The amount of reserves for bad debts or doubtful accounts or other contingencies; and (2) The writing off of loans, other credit accommodations, advances and other assets. [Sec. 49] Purpose  For effective banking supervision. There is a problem of mismatch when a loan becomes non-performing. The bank is paying interest on the money it borrowed from the depositors or other placers of funds, but is not recouping that interest from the loan it made. Eventually, the bank may have to write off loan losses against profits. To cushion this eventuality, the bank is required to set aside reserved for bad debts and other doubtful accounts or contingencies. [Morales, The Philippine General Banking Law]  To address the non-performing asset problem, RA 9182 Special Purpose Vehicle Act was passed. The Monetary Board approved certain accounting guidelines on the sale by banks and other financial institutions for housing under the said Act. [Morales, The Philippine General Banking Law] [N.B. RA 9182 is no longer in effect.]

The BSP shall not pay interest on the reserves maintained with it unless the Monetary Board decides otherwise as warranted by circumstances. [Sec. 94, NCBA]

PDIC INSURANCE

Banks are required to insure their deposit liabilities with the PDIC. PARTIAL INSURANCE  Each depositor is a beneficiary of the insurance for a maximum amount of P500,000, or its foreign currency equivalent in the case of an FCDU deposit. [RA 9576, 2009]  Note: PDIC only insures deposit (not deposit substitute) liabilities of a bank or banking institution [Sec.5, RA 3591, as amended]

RESERVES Purposes (1) To control the volume of money created by the credit operations of the banking system, the BSP requires all banks to maintain reserves against their deposit and depositsubstitute liabilities. (2) As a ready source of funds that will respond to unusually large number of withdrawals or preterminations of deposits or depositsubstitutes, taking in the shape of a bank run. [Morales, The Philippine General Banking Law]

PURPOSE Full insurance might encourage risky banking activities. A limited insurance of bank deposits serves to limit moral hazard.

EQUITY INVESTMENT LIMITS (ALLIED VS. NON-ALLIED)

This is a prudential measure by limiting the exposure of banks in different businesses for the purpose of control, affiliation or other continuing business advantage.

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UB [Sec. 24]

(of allied enterprises) Not exceeding 35% of the net worth of the bank

The equity investment in any one enterprise:

(allied) Not exceeding 25% of the net worth of the bank

(allied/nonallied) Not exceeding 25% of the net worth of the bank

PENALTIES FOR VIOLATION

KB [Sec. 30]

Total (allied & noninvestment in allied equities: enterprises) Not exceeding 50% of the net worth of the bank

MERCANTILE LAW

Violation of any of the provisions of the GBL shall be subject to Sections 34, 35, 36 and 37 of the New Central Bank Act, unless otherwise provided under therein. CRIMINAL SANCTIONS (1) Refusal by an institution subject to examination and supervision by the Monetary Board to file the required report or permit any lawful examination into its affairs [Sec. 34, NCBA] (a) Fine: Not less than Fifty thousand pesos (P50,000) nor more than One hundred thousand pesos (P100,000); or (b) Imprisonment: Not less than one (1) year nor more than five (5) years; or (c) Both fine and imprisonment: in the discretion of the Court. (2) Willful making of a false or misleading statement on a material fact to the Monetary Board or to the examiners of the Bangko Sentral (Sec. 35, NCBA) (a) Fine: Not less than One hundred thousand pesos (P100,000) nor more than One hundred thousand pesos (P200,000); or (b) Imprisonment: Not more than five (5) years; or (c) Both fine and imprisonment, in the discretion of the Court. (3) Willful violation of the NCBA and other pertinent banking laws (including the GBL) being enforced or implemented by the Bangko Sentral or any order, instruction, rule or regulation issued by the Monetary Board [Sec. 36, NCBA] (a) Fine: Not less than Fifty thousand pesos (P50,000) nor more than One hundred thousand pesos (P200,000); or (b) Imprisonment: Not less than two (2) years nor more than ten (10) years; or (c) Both fine and imprisonment, in the discretion of the Court.

Net Worth – the total of the unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments The acquisition of such equity is subject to the prior approval of the MB. The equity investment of a Universal Bank in— (1) Financial Allied Enterprises – 100% of the equity in a thrift bank, rural bank, or financial allied enterprise. [Sec 25 GBL]. A publiclylisted UB or KN may own up to 100% of the voting stock of only one other UB or KB. (2) Non-Financial Allied Enterprises – 100% of the equity of that enterprise [Sec 26 GBL] (3) Non-Allied Enterprises – Not exceeding 35% of the total equity in a single non-allied enterprise not shall it exceed 35% of the voting stock in that enterprise. [Sec 27 GBL] (4) Quasi-banks – 40% of the equity of quasibanks [Sec 28] The equity investment of Commercial Banks in— (1) Financial Allied enterprises – 100% of the equity of a thrift or rural bank. [Sec 31 GBL]. Where the equity investment of a KB is in other financial allied enterprises, including other KBs, such investment shall remain a minority holding in that enterprise. (2) Non-Financial Allied enterprises – 100% of the equity of said enterprises. [Sec 32 GBL] (3) Quasi-banks – 40% of the equity of quasibanks. [Sec 28]

ADMINISTRATIVE SANCTIONS (1) Willful violation of its charter or by-laws; willful delay in the submission of reports or publications thereof as required by law, rules and regulations; Criminal Acts in Nos. 1 to 3 above; and/or conducting business in an

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unsafe or unsound manner as may be determined by the Monetary Board (a) Fine not exceeding Thirty thousand pesos (P30,000) a day for each violation, taking into consideration the attendant circumstances, such as the nature and gravity of the violation or irregularity and the size of the bank or quasi-bank; or (b) Suspension of rediscounting privileges or access to Bangko Sentral credit facilities; (c) Suspension of lending or foreign exchange operations or authority to accept new deposits or make new investments; (d) Suspension of interbank clearing privileges; and/or (e) Revocation of quasi-banking license. (2) Suspension or Removal of Director (a) If the offender is a director or officer of a bank, quasi-bank or trust entity, the Monetary Board may also suspend or remove such director or officer [Sec. 66]. (b) Resignation or termination from office shall not exempt such director or officer from administrative or criminal sanctions. [Sec. 37, NCBA] (3) Dissolution of Bank (a) If the violation is committed by a corporation, such corporation may be dissolved by quo warranto proceedings instituted by the Solicitor General [Sec. 66] (b) Whenever a bank or quasi-bank persists in carrying on its business in an unlawful or unsafe manner, the Monetary Board may commence proceedings in liquidation. [Sec. 36, NCBA in relation to Sec. 30, NCBA]

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(2) To promote and safeguard the interests of the depositing public by way of providing permanent and continuing insurance coverage on all insured deposits [Sec. 1]

POWERS OF THE PDIC (1) To adopt and use a corporate seal (2) To have succession until dissolved by Act of Congress (3) To make contracts (4) To sue and be sued; no attachment or execution shall be issued against it before final judgment (5) To appoint officers and employees not provided in this Act, define their duties, fix their compensation, dismiss them (6) Prescribe by-laws regulating the manner in which their general business may be conducted (7) To exercise express and incidental powers (8) To conduct examination of banks with prior approval of the MB (9) To act as receiver (10) To prescribe rules and regulations (11) To establish its own provident fund which shall consist of contributions made both by PDIC and by its officers and employees to a common fund for the payment of benefits to such officers or employees or their heirs (12) To compromise, condone or release, in whole or in part, any claim or settled liability to PDIC [Sec. 8]

FUNCTIONS OF THE PDIC INSURANCE

 The deposit liabilities of any bank or banking institution, which is engaged in the business of receiving deposits on the effective date of this Act, or which thereafter may engage in the business of receiving deposits, shall be insured with the PDIC [Sec.5]  ’Bank’ and ‘Banking Institution’ - shall include banks, commercial banks, savings bank, mortgage banks, rural banks, development banks, cooperative banks, stock savings and loan associations and branches and agencies in the Philippines of foreign banks and all other corporations authorized to perform banking functions in the Philippines [Sec. 4(b), as amended]

Philippine Deposit Insurance Corporation Act [R.A. 3951, as amended] PURPOSE OF THE PDIC (1) To insure the deposits of all banks which are entitled to the benefits of insurance under this Act

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 Deposit - the unpaid balance of money or its equivalent received by a bank in the usual course of business and for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account, or issued in accordance with Bangko Sentral rules and regulations and other applicable laws, together with such other obligations of a bank, which, consistent with banking usage and practices, the Board of Directors shall determine and prescribe by regulations to be deposit liabilities of the bank [Sec. 4(f), as amended].  What is not considered a deposit? Any obligation of a bank which is payable at the office of the bank located outside of the Philippines [Sec. 4(f), as amended].  Insured deposit - the amount due to any bona fide depositor for legitimate deposits in an insured bank net of any obligation of the depositor to the insured bank as of the date of closure, but not to exceed 500,000 or its equivalent in foreign currency [Sec. 4(g), as amended]

MERCANTILE LAW

 Whenever an insured bank shall have been closed by the Monetary Board pursuant to Section 30 of R.A. 7653, payment of the insured deposits on such closed bank shall be made by the PDIC as soon as possible either (1) by cash or (2) by making available to each depositor a transferred deposit in another insured bank in an amount equal to insured deposit of such depositor [Sec. 14].  Note: Insured deposit shall not exceed 500,000 [Sec. 4(g), as amended]. DETERMINATION OF INSURED DEPOSITS  The determination of insured deposits shall commence upon the PDIC’s actual takeover of the closed bank [Sec. 16(a), as amended].  The amount of the insured deposit shall be determined according to such regulations as the Board of Directors may prescribe, In determining such amount due to any depositor, there shall be added together all deposits in the bank maintained in the same right and capacity for his benefits either in his own name or in the name of others [Sec. 4(g), as amended].  Note: The PDIC may require proof of claims to be filed before paying the insured deposits, and that in any case where the PDIC is not satisfied as to the viability of a claim for an insured deposit, it may require final determination of a court of competent jurisdiction before paying such claim [Sec. 14]

EXCLUSIONS The PDIC shall not pay deposit insurance for the following accounts or transactions, whether denominated, documented, recorded or booked as deposit by the bank: (1) Investment products such as bonds and securities, trust accounts, and other similar instruments; (2) Unfunded, fictitious or fraudulent deposit accounts or transactions; (3) Deposits accounts or transactions constituting, and/or emanating from, unsafe and unsound banking practice/s, as determined by the PDIC, in consultation with the BSP, after due notice and hearing, and publication of a cease and desist order issued by the PDIC against such deposit accounts or transactions; and (4) Deposits that are determined to be the proceeds of an unlawful activity as defined under Republic Act 9160, as amended [Sec. 4(f)]

PER DEPOSITOR, PER CAPACITY RULE In determining the amount due to any depositor, there shall be added together all deposits in the bank maintained in the same right and capacity for his benefits either in his own name or in the name of others [Sec. 4(g), as amended] JOINT ACCOUNTS A joint account regardless of whether the conjunction 'and,' 'or,' 'and/or' is used, shall be insured separately from any individually-owned deposit account [Sec. 4(g), as amended]. IF THE ACCOUNT IS HELD BY TWO OR MORE NATURAL PERSONS OR TWO OR MORE JURIDICAL PERSONS General rule: The maximum insured deposit shall be divided into as many equal shares as

EXTENT OF LIABILITY  The liability of the Corporation is to the extent of the insured deposit [Sec.14].

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there are individuals or juridical persons [Sec. 4(g), as amended].

MERCANTILE LAW

FAILURE TO SETTLE CLAIM OF INSURED DEPOSITOR General rule: Failure to settle the claim within six (6) months from the date of filing of claim for insured deposit shall, upon conviction, subject the directors, officers or employees of the PDIC responsible for the delay to imprisonment from six (6) months to one (1) year.

Exception: Unless a different sharing is stipulated in the document of deposit [Sec. 4(g), as amended]. IF THE ACCOUNT IS HELD BY A JURIDICAL PERSON OR ENTITY JOINTLY WITH ONE OR MORE NATURAL PERSONS  The maximum insured deposits shall be presumed to belong entirely to such juridical person or entity [Sec. 4(g), as amended].  Note: The aggregate of the interest of each co-owner over several joint accounts, whether owned by the same or different combinations of individuals, juridical persons or entities, shall likewise be subject to the maximum insured deposit of P500,000.00 [Sec. 4(g), as amended].

Exceptions: (1) Such failure was not due to grave abuse of discretion, gross negligence, bad faith, or malice of the directors, officers or employees; or (2) The validity of the claim requires the resolution of issues of facts and or law by another office, body or agency including the case mentioned in the first proviso or by PDIC together with such other office, body or agency.

MODE OF PAYMENT  Payment of the insured deposits on such closed bank shall be made by the PDIC as soon as possible either: (1) by cash; (2) by making available to each depositor a transferred deposit in another insured bank in an amount equal to insured deposit of such depositor [Sec. 14]  Note: ‘Transfer Deposit’ means a deposit in an insured bank made available to a depositor by the PDIC as payment of insured deposit of such depositor in a closed bank and assumed by another insured bank [Sec. 4(h), as amended].

FAILURE OF DEPOSITOR TO CLAIM INSURED DEPOSITS  All rights of the depositor against the PDIC with respect to the insured deposit shall be barred: (1) If he fails to claim the insured deposits within two (2) years from actual takeover of the closed bank by the receiver; or (2) If he does not enforce his claim filed with the corporation within two (2) years after the two-year period to file a claim.  BUT all rights of the depositor against the closed bank and its shareholders or the receivership estate to which the PDIC may have become subrogated, shall thereupon revert to the depositor.  Thereafter, the PDIC shall be discharged from any liability on the insured deposit [Sec. 16(e), as amended].

EFFECT OF PAYMENT (1) The PDIC shall be discharged from liability to the depositor [Sec. 16(b)] (2) The PDIC, upon payment of any depositor as provided for in Section 14 shall be subrogated to all rights of the depositor against the closed bank to the extent of such payment [Sec. 15] (3) Payments by the PDIC of insured deposits in closed banks partake of the nature of public funds, and as such, must be considered a preferred credit similar to taxes due to the National Government in the order of preference under Article 2244 of the New Civil Code [Sec. 15]

BANK EXAMINATION The PDIC may examine an insured bank with prior approval of the MB if, in its opinion, such bank or its directors or agents have violated, are violating or about to violate any provision of the PDIC Act or any order, rule or instruction issued by the PDIC or any written condition imposed by the PDIC in connection with any transaction with or grant by it. [Sec. 7 in relation to Sec. 8]

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(5) BSP/PDIC inquiry if there is a finding of unsafe and unsound banking practice [as in the case of peso deposits, supra] (6) In Salvacion vs. CB (1997), where a Filipino child was raped by a foreigner, the SC allowed, pro hac vice, garnishment of foreign currency deposits stating: If we rule that the questioned Section 113 of CB Circular No. 960 which exempts from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever, is applicable to a foreign transient, injustice would result especially to a citizen aggrieved by a foreign guest.

FINANCIAL ASSISTANCE The PDIC may grant financial assistance to distressed banks if it is proven to be a less costly alternative than closure [Sec. 17(d)].

RECEIVERSHIP OF BANKS [SEC. 10]

CLOSED

LIQUIDATION OF BANKS [SEC. 17 (D)]

CLOSED

MERCANTILE LAW

Foreign Currency Deposit Act [RA 6426]

PRIVILEGES

The FCDA allows any person to deposit, and banks to accept deposit, any foreign currency acceptable as part of the Philippines’ international reserve. (Secs. 2 & 3)

(1) Tax exemption – the FCD, including interests and all other income or earnings of such deposits, are exempt from any and all taxes whatsoever if these deposits are made by non-residents and irrespective of whether or not the non-residents are engaged in trade or business in the Philippines (Sec. 6 as amended). Interests on FCDs of residents are subject to 7.5% withholding tax. (2) Exemption from attachment, garnishment or any other order or process of any court, legislative or administrative body, or government agency whatsoever [Sec. 8]

SECRECY OF FOREIGN CURRENCY DEPOSITS

 All foreign currency deposits are declared as and considered of an absolutely confidential nature and, except upon the written permission of the depositor, in no instance shall be examined, inquired or looked into by any person, government official, bureau or office, whether judicial or administrative, or legislative or any other entity whether public or private. [Sec. 8]  The foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. [Sec. 8]

Exception: The CA, upon application ex parte by the AMLC and after determination that a probable cause exists that any monetary instrument or property is in any way related to an “unlawful activity”, the AMLC, may freeze the account [Sec. 10, RA 9160].

Exceptions: (1) Upon written permission of the depositor [Sec. 8; Intengan vs CA, 2002] (2) Upon order of a competent court in cases of violation of the Anti-Money Laundering Act of 2001 [as in the case of peso deposits, supra] (3) During Bangko Sentral’s periodic or special examinations [as in the case of peso deposits, supra], and (4) Disclosure of the Treasurer of the Philippines when the unclaimed balances law applies [Act 3936, as amended by PD 679] PAGE 216

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Intellectual Property Rights in General

MERCANTILE LAW

INTELLECTUAL PROPERTY RIGHTS

DEFINITION - Those property rights which result from the physical manifestation of original thought. [Ballantine’s Law Dictionary]

STATE POLICIES (1) To protect and secure the exclusive rights of scientists, inventors, artists and other gifted citizens to their intellectual property and creations, particularly when beneficial to the people, for such periods as provided in this Act. (2) To promote the diffusion of knowledge and information for the promotion of national development and progress and the common good. (3) To streamline administrative procedures of registering patents, trademarks and copyright, to liberalize the registration on the transfer of technology, and to enhance the enforcement of intellectual property rights in the Philippines. [Sec. 2, RA 8293]

Note: There are no property rights protected by law in mere ideas or mental conceptions. When creations of mind are put in tangible form, there is appropriate subject of property that is protected by law. [63A Am Jur 3rd Property, Section 5]

INTELLECTUAL PROPERTY RIGHTS UNDER THE INTELLECTUAL PROPERTY CODE

(1) Copyright; (2) Related Rights of copyright; (3) Trademarks and Service Marks; (4) Geographic Indications; (5) Industrial Designs; (6) Patents; (7) Layout-Designs (Topographies) of Integrated Circuits; [Sec. 4, RA 8293] (8) Protection of Undisclosed Information (TRIPS Agreement).

INTERNATIONAL CONVENTIONS GOVERNING INTELLECTUAL PROPERTY RIGHTS (1) Berne Convention for the Protection of Literary and Artistic Works as revised by the Brussels Act (August 1, 1951) (2) Paris Convention for the Protection of Industrial Property Rights (September 27, 1965) (3) International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations (Rome Convention, September 25, 2984) (4) Convention Establishing the World Intellectual Property Organization (July 14, 1980) (5) Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure (October 21, 1981) (6) Agreement on Trade Related Aspects of Intellectual Property Including Trade in Counterfeit Goods of General Agreement on Tariffs and Trade. (7) Patent Cooperation Treaty (August 17, 2001) (8) Madrid Protocol

DIFFERENCES BETWEEN COPYRIGHTS, TRADEMARKS AND PATENT Patentable Inventions - Refer to any technical solution of a problem in any field of human activity, which is new, involves an inventive step and is industrially applicable. It may be, or refer to, any product, process, or an improvement of any of the foregoing. [Sec. 21, RA 8293] It is vested from the issuance of letters of patent. Trademark - any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods. [Kho v. CA, et al. (2002)] It is vested from registration. Trade Name - the name or designation identifying or distinguishing an enterprise [Sec. 121.3, RA 8293]

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Copyright - right granted by statute to the author or originator of literary, scholarly, scientific, or artistic productions, including computer programs. A copyright gives him the legal right to determine how the work is used and to obtain economic benefits from the work. For example, the owner of a copyright for a book or a piece of software has the exclusive rights to use, copy, distribute, and sell copies of the work, including later editions or versions of the work. If another person improperly uses material covered by a copyright, the copyright owner can obtain legal relief. [Rule 2, Copyright Safeguards and Regulations]

MERCANTILE LAW

OTHER FORMS OF INTELLECTUAL PROPERTY GEOGRAPHIC INDICATION One which identifies a good as originating in the territory of a TRIPS member, or a region or locality in that territory where a given quality, reputation or other characteristic of a good is essentially attributable to its geographical origin [Art. 22, TRIPS Agreement] INDUSTRIAL DESIGN Any composition of lines or colors or any threedimensional form, whether or not associated with lines or colors: Provided, that such composition or form gives a special appearance to and can serve as pattern for an industrial product or handicraft. (Sec. 112.1, RA 8293)

Copyright or economic rights shall consist of the exclusive right to carry out, authorize or prevent the following acts: (1) Reproduction of the work or substantial portion of the work (2) Dramatization, translation or adaptation, abridgment, arrangement or other transformation of the work. (3) The first public distribution of the original and each copy of the work by sale or other forms of transfer of ownership. (4) Rental of the original or a copy of an audiovisual or cinematographic work, a work embodied in a sound recording, a computer program, a compilation of data and other materials or a musical work in graphic form, irrespective of the ownership of the original or the copy which is the subject of the rental. (5) Public Display of the original or a copy of the work. (6) Public Performance of the Work; (7) Other Communication to the public of the work. [Sec. 177, IPC]

LAYOUT DESIGN (TOPOGRAPHY) OF AN INTEGRATED CIRCUIT Layout Design (Topography). — The threedimensional disposition, however expressed, of the elements, at least one of which is an active element, and of some or all the interconnections of an integrated circuit, or such a three-dimensional disposition prepared for an integrated circuit intended for manufacture. (Sec. 112.3, RA 8293) Integrated Circuit. — a product, in its final form, or an intermediate form, in which the elements, at least one of which is an active element and some or all of the interconnections are integrally formed and/or on a piece of material, and which is intended to perform an electronic function. [Sec. 112.2, RA 8293] UNDISCLOSED INFORMATION (1) Is a secret in a sense that it is not, as a body or in the precise configuration and assembly of components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question; (2) Has a commercial value because it is secret; and (3) Has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret [Art. 39, TRIPS]

Copyright is confined to literary and artistic works which are original intellectual creations in the literary and artistic domain protected from the moment of their creation. [Kho v. CA, et al. (2002)] It is vested from the moment of creation.

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TRANSFER

inventor identified in both applications are not one and the same. [Sec. 24.2, RA 8293]

Refers to contracts or agreements involving: (1) the transfer of systematic knowledge for the manufacture of a product; (2) the application of a process, or rendering of a service including management contracts; (3) The transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for mass market. [Sec. 4.2, RA 8293]

Non-Prejudicial Disclosures: This is an exception to the General Rule on Prior Art under Sec. 24. It provides that the disclosure of the information contained in the application during the 12 months preceding the filing date or the priority date of the application shall not prejudice the applicant on the ground of lack of novelty if such disclosure was made by: (1) The inventor (2) A patent office and the information contained (1) in another application filed by the inventor and should not have been disclosed by the office, or (2) in an application filed without the knowledge or consent of the inventor by a third party which obtained the information directly or indirectly from the inventor (3) A third party which obtained the information directly or indirectly from the inventor [Sec. 25, RA 8293]

TECHNOLOGY ARRANGEMENTS

Patents PATENTABLE INVENTIONS

A patentable invention is any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable shall be Patentable. It may be, or may relate to, a product, or process, or an improvement of any of the foregoing. [Sec. 21, RA 8293]

(a) Inventive Step. — An invention involves an inventive step if, having regard to prior art, it is not obvious to a person skilled in the art at the time of the filing date or priority date of the application claiming the invention. [Sec. 26.1, RA 8293, as amended by RA 9502]

INVENTION PATENT STANDARDS: Novelty. —An invention shall not be considered new if it forms part of a prior art. [Sec. 23, RA 8293] Prior art shall consist of: (1) Everything which has been made available to the public anywhere in the world, before the filing date or the priority date of the application claiming the invention; [Sec. 24.1, RA 8293] (2) The whole contents of an application for a patent, utility model, or industrial design registration, published in accordance with this Act, filed or effective in the Philippines, with a filing or priority date that is earlier than the filing or priority date of the application: Provided, That the application which has validly claimed the filing date of an earlier application under Section 31 of this Act, shall be prior art with effect as of the filing date of such earlier application: Provided further, That the applicant or the

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Cheaper Medicines Act: In case of drugs and medicines, there is no inventive step if the invention results from the mere discovery of a new form or new property of a known substance which does not result in enhancement of the known efficacy of that substance, or the mere discovery of any new property or new use of a known substance or the mere use of a known process unless such known process results in a new product that employs at least one reactant. [Sec. 26.2, RA 8293 as amended by RA 9502] (b) Industrial Applicability. —An invention that can be produced and used in any industry shall be industrially applicable. [Sec. 27, RA 8293]

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UTILITY  It is any technical solution of a problem in any field of human activity which is new and industrially applicable. Unlike an invention patent, a utility model need not be inventive. The law merely requires that it be novel and industrially applicable. [Sec. 109.1, RA 8293]  A utility model registration shall expire, without any possibility of renewal, at the end of the seventh year after the date of the filing of the application. [Sec. 109.3, RA 8293]

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material, and which is intended to perform an electronic function. [Sec. 112.2, RA 8293 as amended by RA 9150] Layout-Design is synonymous with 'Topography' and means the three-dimensional disposition, however expressed, of the elements, at least one of which is an active element, and of some or all of the interconnections of an integrated circuit, or such a three-dimensional disposition prepared for an integrated circuit intended for manufacture. [Sec. 112.3, RA 8293 as amended by RA 9150]

STATUTORY CLASSES OF UTILITY MODELS A Utility Model may be, or may relate to: (a) A useful machine; (b) An implement or tool; (c) A product or composition; (d) A method or process; or (e) An improvement of any of the foregoing. [Rule 201, Rules and Regulations on Utility Models and Industrial Designs as amended]

NON-PATENTABLE INVENTIONS

The following shall be excluded from patent protection: (1) Discoveries, scientific theories and mathematical methods, and in the case of drugs and medicines, the mere discovery of a new form or new property of a known substance which does not result in the enhancement of the known efficacy of that substance, or the mere discovery of any new property or new use for a known substance, or the mere use of a known process unless such known process results in a new product that employs at least one new reactant.

GROUNDS FOR CANCELLATION OF UTILITY MODELS (a) That the claimed invention does not qualify for registration as a utility model and does not meet the requirements of registrability; (b) That the description and the claims do not comply with the prescribed requirements; (c) That any drawing which is necessary for the understanding of the invention has not been furnished; (d) That the owner of the utility model registration is not the inventor or his successor in title [Sec 109.4, RA 8293]

Salts, esters, ethers, polymorphs, metabolites, pure form, particle size, isomers, mixtures of isomers, complexes, combinations, and other derivatives of a known substance shall be considered to be the same substance, unless they differ significantly in properties with regard to efficacy; [Sec. 22.1, RA 8293 as amended by RA 9502] (2) Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computers; [Sec. 22.2, RA 8293] (3) Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body. This provision shall not apply to products and composition for use in any of these methods; [Sec. 22.3, RA 8293] (4) Plant varieties or animal breeds or essentially biological process for the

INDUSTRIAL DESIGN An industrial design is any composition of lines or colors or any three-dimensional form, whether or not associated with lines or colors: Provided that such composition or form gives a special appearance to and can serve as pattern for an industrial product or handicraft. [Sec. 112.1, RA 8293 as amended by RA 9150] LAY-OUT DESIGNS (TOPOGRAPHIES) OF INTEGRATED CIRCUITS Integrated Circuit means a product, in its final form, or an intermediate form, in which the elements, at least one of which is an active element and some or all of the interconnections are integrally formed in and/or on a piece of

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production of plants or animals. This provision shall not apply to micro-organisms and non-biological and microbiological processes; [Sec. 22.4, RA 8293] (5) Aesthetic creations; [Sec. 22.5, RA 8293] (6) Anything which is contrary to public order or morality. [Sec. 22.6, RA 8293]

MERCANTILE LAW

who has the earliest filing date or, the earliest priority date. [Sec. 29, RA 8293]

INVENTIONS CREATED PURSUANT TO A COMMISSION

Commission - Person who commissions the work shall own the patent, unless otherwise provided in the contract [Sec. 30.1, RA 8293)

Cheaper Medicines Act: In addition to discoveries, scientific theories and mathematical methods, the IP Code now includes, in case of drugs and medicines: (1) The mere discovery of a new form or new property of a known substance which does not result in the enhancement of the known efficacy of that substance (2) the mere discovery of any new property or new use of a known substance (3) the mere use of a known process unless such known process results in a new product that employs at least one reactant [Sec. 26.2, RA 8293 as amended by RA 9502]

Employment Contract  Patent belongs to the employee if the inventive activity is not a part of his regular duties even if the employee uses the time, facilities and materials of the employer. [Sec. 30.2 (a), RA 8293]  Patent belongs to the employer if the invention is the result of the performance of his regularly-assigned duties, unless there is an agreement, express or implied, to the contrary. [Sec. 30.2 (b), RA 8293]

RIGHT OF PRIORITY

An application for patent filed by any person who has previously applied for the same invention in another country which by treaty, convention, or law affords similar privileges to Filipino citizens, shall be considered as filed as of the date of filing the foreign application: Provided, That: (a) the local application expressly claims priority; (b) it is filed within twelve (12) months from the date the earliest foreign application was filed; and (c) a certified copy of the foreign application together with an English translation is filed within six (6) months from the date of filing in the Philippines. [Sec. 31, RA 8293]

OWNERSHIP OF A PATENT RIGHT TO A PATENT

General Rule: The right to patent belongs to the inventor, his heirs, or assigns. When two (2) or more persons have jointly made an invention, the right to a patent shall belong to them jointly. (Sec.28, RA 8293) Exception: Inventions created pursuant to a commission (Work for Hire Doctrine) (1) The employer has the right to the patent if the invention is the result of the performance of the employee’s regularly assigned duties [Sec. 30.2, RA 8293] (2) In case of inventions created pursuant to a commission, the person who commissions the work shall own the patent [Sec. 30.1, RA 8293]

GROUNDS FOR CANCELLATION OF A PATENT Any interested person may, upon payment of the required fee, petition to cancel the patent or any claim thereof, or parts of the claim, on any of the following grounds: (a) That what is claimed as the invention is not new or patentable; (b) That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or

FIRST-TO-FILE RULE

If two (2) or more persons have made the invention separately and independently of each other, the right to the patent shall belong to the person who filed an application for such invention, or where two or more applications are filed for the same invention, to the applicant

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(c) That the patent is contrary to public order or morality. [Sec. 61.1, RA 8293]

substitution as patentee, or at the option of the true inventor, cancel the patent, and award actual and other damages in his favor if warranted by the circumstances. [Sec. 68, RA 8293]

Where the grounds for cancellation relate to some of the claims or parts of the claim, cancellation may be effected to such extent only. [Sec. 61.2, RA 8293]

TIME TO FILE ACTION IN COURT

The action shall be filed within one (1) year from the date of publication made in accordance with Sections 44 and 51, respectively. [Sec. 70, RA 8293]

REQUIREMENT OF THE PETITION

The petition for cancellation shall be in writing, verified by the petitioner or by any person in his behalf who knows the facts, specify the grounds upon which it is based, include a statement of the facts to be relied upon, and filed with the Office. Copies of printed publications or of patents of other countries, and other supporting documents mentioned in the petition shall be attached thereto, together with the translation thereof in English, if not in English language. [Sec. 62, RA 8293]

REMEDY OF PERSONS NOT HAVING THE RIGHT TO A PATENT If a person other than the applicant, is declared by final court order or decision as having the right to the patent, such person may, within three (3) months after the decision has become final: (1) Prosecute the application as his own application in place of the applicant; (2) File a new patent application in respect of the same invention; (3) Request that the application be refused; or (4) Seek cancellation of the patent, if one has already been issued. [Sec. 67, RA 8293]

NOTICE OF HEARING

Upon filing of a petition for cancellation, the Director of Legal Affairs shall forthwith serve notice of the filing thereof upon the patentee and all persons having grants or licenses, or any other right, title or interest in and to the patent and the invention covered thereby, as appears of record in the Office, and of notice of the date of hearing thereon on such persons and the petitioner. Notice of the filing of the petition shall be published in the IPO Gazette. [Sec. 63, RA 8293]

EFFECT OF CANCELLATION PATENT OR CLAIM

MERCANTILE LAW

RIGHTS CONFERRED PATENT

BY

A

A patent shall confer on its owner the following exclusive rights: (1) Where the subject matter of a patent is a product, to restrain, prohibit and prevent any unauthorized person or entity from making, using, offering for sale, selling or importing that product. [Sec. 71.1(a), RA 8293] (2) Where the subject matter of a patent is a process, to restrain, prevent or prohibit any unauthorized person or entity from using the process, and from manufacturing, dealing in, using, selling or offering for sale, or importing any product obtained directly or indirectly from such process. [Sec. 71.1(b), RA 8293] (3) Patent owners shall also have the right to assign, or transfer by succession the patent, and to conclude licensing contracts for the same. [Sec. 71.2, RA 8293]

OF

The rights conferred by the patent or any specified claim or claims cancelled shall terminate. Notice of the cancellation shall be published in the IPO Gazette. Unless restrained by the Director General, the decision or order to cancel by Director of Legal Affairs shall be immediately executory even pending appeal. [Sec. 66, RA 8293]

REMEDY OF THE TRUE AND ACTUAL INVENTOR If a person, who was deprived of the patent without his consent or through fraud is declared by final court order or decision to be the true and actual inventor, the court shall order for his

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related thereto, solely for purposes reasonably related to the development and submission of information and issuance of approvals by government regulatory agencies required under any law of the Philippines or of another country that regulates the manufacture, construction, use or sale of any product: Provided, That, in order to protect the data submitted by the original patent holder from unfair commercial use provided in Article 39.3 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), the Intellectual Property Office, in consultation with the appropriate government agencies, shall issue the appropriate rules and regulations necessary therein not later than one hundred twenty (120) days after the enactment of this law; [Sec. 72.4, RA 8293 as amended by RA 9502] (e) Where the act consists of the preparation for individual cases, in a pharmacy or by a medical professional, of a medicine in accordance with a medical shall apply after a drug or medicine has been introduced in the Philippines or anywhere else in the world by the patent owner, or by any party authorized to use the invention: Provided, further, That the right to import the drugs and medicines contemplated in this section shall be available to any government agency or any private third party; [Sec. 72.5, RA 8293 as amended by RA 9502]

Pearl Dean, Inc. v. Shoemart, Inc. (2003): To be able to effectively and legally preclude others from copying and profiting from the invention, a patent is a primordial requirement. No patent, no protection. The ultimate goal of a patent system is to bring new designs and technologies into the public domain through disclosure Ideas, once disclosed to the public without the protection of a valid patent, are subject to appropriation without significant restraint.

LIMITATIONS RIGHTS

OF

MERCANTILE LAW

PATENT

The owner of a patent has no right to prevent third parties from performing, without his authorization, the acts referred to in Section 71 hereof in the following circumstances: (a) Using a patented product which has been put on the market in the Philippines by the owner of the product, or with his express consent, insofar as such use is performed after that product has been so put on the said market: Provided, That, with regard to drugs and medicines, the limitation on patent rights shall apply after a drug or medicine has been introduced in the Philippines or anywhere else in the world by the patent owner, or by any party authorized to use the invention: Provided, further, That the right to import the drugs and medicines contemplated in this section shall be available to any government agency or any private third party; [Sec. 72.1, RA 8293 as amended by RA 9502] (b) Where the act is done privately and on a non-commercial scale or for a noncommercial purpose: Provided, That it does not significantly prejudice the economic interests of the owner of the patent; [Sec. 72.2, RA 8293 as amended by RA 9502] (c) Where the act consists of making or using exclusively for experimental use of the invention for scientific purposes or educational purposes and such other activities directly related to such scientific or educational experimental use; [Sec. 72.3, RA 8293 as amended by RA 9502] (d) In the case of drugs and medicines, where the act includes testing, using, making or selling the invention including any data

 There shall be no infringement of trademarks or tradenames of imported or sold drugs and medicines allowed as well as imported or sold off-patent drugs and medicines: Provided, That said drugs and medicines bear the registered marks that have not been tampered, unlawfully modified, or infringed. [Sec.159.4 RA 8293 as amended by RA 9502]

PRIOR USER

 Notwithstanding Section 72 hereof, any prior user, who, in good faith was using the invention or has undertaken serious preparations to use the invention in his enterprise or business, before the filing date or priority date of the application on which a patent is granted, shall have the right to continue the use thereof as envisaged in such

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preparations within the territory where the patent produces its effect. [Sec. 73.1, RA 8293]  The right of the prior user may only be transferred or assigned together with his enterprise or business, or with that part of his enterprise or business in which the use or preparations for use have been made. [Sec. 73.2, RA 8293]

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component of a patented product or of a product produced because of a patented process knowing it to be especially adopted for infringing and not suitable for substantial noninfringing. He is jointly and severally liable with the infringer. [Sec. 76.6, RA 8293]

DOCTRINE OF PATENT EXHAUSTION

It espouses that the patentee who has already sold his invention and has received all the royalty and consideration for the same will be deemed to have released the invention from his monopoly. The invention thus becomes open to use of the purchaser without further restriction. [Adams v. Burke, in Notes on Selected Commercial Laws, Catindig 2003 ed.]

USE BY THE GOVERNMENT

 A Government agency or third person authorized by the Government may exploit the invention even without agreement of the patent owner where: (a) The public interest, in particular, national security, nutrition, health or the development of other sectors, as determined by the appropriate agency of the government, so requires; [Sec. 74.1(a), RA 8293] (b) A judicial or administrative body has determined that the manner of exploitation, by the owner of the patent or his licensee, is anti-competitive. [Sec. 74.1(b), RA 8293]  The use by the Government, or third person authorized by the Government shall be subject, mutatis mutandis, to the conditions set forth in Sections 95 to 97 and 100 to 102 on compulsory licensing. [Sec. 74.2, RA 8293]  All cases arising from the implementation of this provision shall be cognizable by courts with appropriate jurisdiction provided by law. No court except the Supreme Court of the Philippines, shall issue any temporary restraining order or preliminary injunction or such other provisional remedies that will prevent its immediate execution. [Sec. 74.3, RA 8293 as amended by RA 9502]

TESTS IN PATENT INFRINGEMENT

LITERAL INFRINGEMENT In using literal infringement as a test, resort must be had in the first instance to the words of the claim. To determine whether the particular item falls within the literal meaning of the patent claims, the court must juxtapose the claims of the patent and the accused product within the overall context of the claims and specifications, to determine whether there is exact identity of all material elements. [Godinez v. CA (1993)] DOCTRINE OF EQUIVALENTS  Under the doctrine of equivalents, an infringement also occurs when a device appropriates a prior invention by incorporating its innovative concept and, albeit with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result. [Godinez v. CA (1993)]  In order to infringe a patent, a machine or device must perform the same function, or accomplish the same result by identical or substantially identical means and the principle or mode of operation must be substantially the same. [Del Rosario v. CA (1996)]  The doctrine of equivalents provides that an infringement also takes place when a device appropriates a prior invention by incorporating its innovative concept and, although with some modification and change,

PATENT INFRINGEMENT It is the making, using, offering for sale, selling, or importing a patented product or a product obtained directly or indirectly from a patented process, or the use of a patented process without the authorization of the patentee. [Sec 76.1, RA 8293 as amended by RA 9502]

CONTRIBUTORY INFRINGER

One who actively induces the infringement of a patent or provides the infringer with a

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performs substantially the same function in substantially the same way to achieve substantially the same result. The principle or mode of operation must be the same or substantially the same. The doctrine of equivalents thus requires satisfaction of the function-means-and-result test, the patentee having the burden to show that all three components of such equivalency test are met. [Smith Klein Beckman Corp. v. CA (2003)]

DEFENSES IN INFRINGEMENT

ACTION

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event of litigation, the venue shall be the proper court in the place where the licensee has its principal office; [Sec. 88.1, RA 8293] (2) Continued access to improvements in techniques and processes related to the technology shall be made available during the period of the technology transfer arrangement; [Sec. 88.2, RA 8293] (3) In the event the technology transfer arrangement shall provide for arbitration, the Procedure of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the Philippines or any neutral country; [Sec. 88.3, RA 8293] (4) The Philippine taxes on all payments relating to the technology transfer arrangement shall be borne by the licensor. [Sec. 88.4, RA 8293]

FOR

In an action for infringement, the defendant, in addition to other defenses available to him, may show the invalidity of the patent, or any claim thereof, on any of the grounds on which a petition of cancellation can be brought under Section 61. [Sec 81, RA 8293] PATENT FOUND INVALID MAY BE CANCELLED: In an action for infringement, if the court shall find the patent or any claim to be invalid, it shall cancel the same, and the Director of Legal Affairs upon receipt of the final judgment of cancellation by the court, shall record that fact in the register of the Office and shall publish a notice to that effect in the IPO Gazette. [Sec 82, RA 8293]

PROHIBITED CLAUSES The following provisions shall be deemed prima facie to have an adverse effect on competition and trade: (a) Those which impose upon the licensee the obligation to acquire from a specific source capital goods, intermediate products, raw materials, and other technologies, or of permanently employing personnel indicated by the licensor; [Sec. 87.1, RA 8293] (b) Those pursuant to which the licensor reserves the right to fix the sale or resale prices of the products manufactured on the basis of the license; [Sec. 87.2, RA 8293] (c) Those that contain restrictions regarding the volume and structure of production; [Sec. 87.3, RA 8293] (d) Those that prohibit the use of competitive technologies in a non-exclusive technology transfer agreement; [Sec. 87.4, RA 8293] (e) Those that establish a full or partial purchase option in favor of the licensor; [Sec. 87.5, RA 8293] (f) Those that obligate the licensee to transfer for free to the licensor the inventions or improvements that may be obtained through the use of the licensed technology; [Sec. 87.6, RA 8293]

DOCTRINE OF FILE WRAPPER ESTOPPEL Patentee is precluded from claiming as part of patented product that which he had to excise or modify in order to avoid patent office rejection, and he may omit any additions he was compelled to add by patent office regulations. [Advance Transformer Co. v. Levinson 837 F.2d 1081(1988)]

LICENSING VOLUNTARY

Voluntary Licensing is the grant by the patent owner to a third person of the right to exploit the patented invention. [Sec. 85, RA 8293] MANDATORY PROVISIONS The following provisions shall be included in voluntary license contracts: (1) That the laws of the Philippines shall govern the interpretation of the same and in the

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(g) Those that require payment of royalties to the owners of patents for patents which are not used; [Sec. 87.7, RA 8293] (h) Those that prohibit the licensee to export the licensed product unless justified for the protection of the legitimate interest of the licensor such as exports to countries where exclusive licenses to manufacture and/or distribute the licensed product(s) have already been granted; [Sec. 87.8, RA 8293] (i) Those which restrict the use of the technology supplied after the expiration of the technology transfer arrangement, except in cases of early termination of the technology transfer arrangement due to reason(s) attributable to the licensee; [Sec. 87.9, RA 8293] (j) Those which require payments for patents and other industrial property rights after their expiration, termination arrangement; [Sec. 87.10, RA 8293] (k) Those which require that the technology recipient shall not contest the validity of any of the patents of the technology supplier; [Sec. 87.11, RA 8293] (l) Those which restrict the research and development activities of the licensee designed to absorb and adapt the transferred technology to local conditions or to initiate research and development programs in connection with new products, processes or equipment; [Sec. 87.12, RA 8293] (m) Those which prevent the licensee from adapting the imported technology to local conditions, or introducing innovation to it, as long as it does not impair the quality standards prescribed by the licensor; [Sec. 87.13, RA 8293] (n) Those which exempt the licensor for liability for non-fulfillment of his responsibilities under the technology transfer arrangement and/or liability arising from third party suits brought about by the use of the licensed product or the licensed technology; ]Sec. 87.14, RA 8293] (o) Other clauses with equivalent effects. [Sec. 87.15, RA 8293]

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Effect of Non-Compliance with Any Provisions of Secs. 87 And 88 The technology transfer arrangement shall automatically be rendered unenforceable, unless said technology transfer arrangement is approved and registered with the Documentation, Information and Technology Transfer Bureau under the provisions of Section 91 on exceptional cases. [Sec. 92, RA 8293] Right of Licensor. — Unless otherwise provided in the technology transfer agreement, the licensor shall have the right to: (a) Grant further licenses to third person (b) Exploit the subject matter of the technology transfer agreement [Sec. 89, RA 8293] Right of the Licensee. — To exploit the subject matter of the technology transfer agreement during the whole term of the agreement. [Sec. 90, RA 8293] Exceptional cases (a) In exceptional or meritorious cases where substantial benefits will accrue to the economy, such as high technology content, increase in foreign exchange earnings, employment generation, regional dispersal of industries and/or substitution with or use of local raw materials (b) The case of BOI-registered companies with pioneer status [Sec. 91, RA 8293]

COMPULSORY

Compulsory Licensing is the grant of the Director of Legal Affairs of a license to exploit a patented invention, even without the agreement of the patent owner, in favor of any person who has shown his capability to exploit the invention. [Sec. 93, Ra 8293 as amended by RA 9502] GROUNDS The Director General of the Intellectual Property Office may grant a license to exploit a patented invention, even without the agreement of the patent owner, in favor of any person who has shown his capability to exploit the invention, under any of the following circumstances: (a) National emergency or other circumstances of extreme urgency; [Sec. 93.1, RA 8293 as amended by RA 9502]

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(b) Where the public interest, in particular, national security, nutrition, health or the development of other vital sectors of the national economy as determined by the appropriate agency of the Government, so requires; [Sec. 93.2, RA 8293 as amended by RA 9502] (c) Where a judicial or administrative body has determined that the manner of exploitation by the owner of the patent or his licensee is anti-competitive; [Sec. 93.3, RA 8293 as amended by RA 9502] (d) In case of public non-commercial use of the patent by the patentee, without satisfactory reason; [Sec. 93.4, RA 8293 as amended by RA 9502] (e) If the patented invention is not being worked in the Philippines on a commercial scale, although capable of being worked, without satisfactory reason: Provided, That the importation of the patented article shall constitute working or using the patent; [Sec. 93.5, RA 8293 as amended by RA 9502] (f) Where the demand for patented drugs and medicines is not being met to an adequate extent and on reasonable terms, as determined by the Secretary of the Department of Health. [Sec. 93.6, RA 8293 as amended by RA 9502] (g) If the invention protected by a patent, hereafter referred to as the "second patent," within the country cannot be worked without infringing another patent, hereafter referred to as the "first patent," granted on a prior application or benefiting from an earlier priority, a compulsory license may be granted to the owner of the second patent to the extent necessary for the working of his invention, subject to certain conditions. [Sec. 97, RA 8293] (h) Manufacture and export of drugs and medicines to any country having insufficient or no manufacturing capacity in the pharmaceutical sector to address public health problems: Provided, That, a compulsory license has been granted by such country or such country has, by notification or otherwise, allowed importation into its jurisdiction of the patented drugs and medicines from the Philippines in compliance with the TRIPS Agreement. [Sec. 93-A.2, RA 8293 as amended by RA 9502]

MERCANTILE LAW

PERIOD OF FILING A PETITION FOR COMPULSORY LICENSE At any time after the grant of patent. However, a compulsory license may not be applied for on the ground stated in Sec. 93.5 before the expiration of a period of four (4) years from the date of filing of the application or three (3) years from the date of the patent whichever period expires last. [Sec. 94, RA 8293 as amended by RA 9502] REQUIREMENT TO OBTAIN A LICENSE ON REASONABLE COMMERCIAL TERMS General Rule: The license will only be granted after the petitioner has made efforts to obtain authorization from the patent owner on reasonable commercial terms and conditions but such efforts have not been successful within a reasonable period of time. [Sec. 95.1, RA 8293 as amended by RA 9502] Exceptions: The requirement of authorization shall not apply in the following cases: (a) Where the petition for compulsory license seeks to remedy a practice determined after judicial or administrative process to be anticompetitive; (b) In situations of national emergency or other circumstances of extreme urgency; (c) In cases of public non-commercial use. (d) In cases where the demand for the patented drugs and medicines in the Philippines is not being met to an adequate extent and on reasonable terms, as determined by the Secretary of the Department of Health. [Sec. 95.2, RA 8293 as amended by RA 9502] TERMS AND CONDITIONS OF COMPULSORY LICENSE (a) The scope and duration of such license shall be limited to the purpose for which it was authorized; [Sec. 100.1, RA 8293] (b) The license shall be non-exclusive; [Sec. 100.2, RA 8293] (c) The license shall be non-assignable, except with that part of the enterprise or business with which the invention is being exploited; [Sec. 100.3, RA 8293] (d) Use of the subject matter of the license shall be devoted predominantly for the supply of the Philippine market: Provided, that this limitation shall not apply where the grant of

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the license is based on the ground that the patentee's manner of exploiting the patent is determined by judicial or administrative process, to be anti-competitive. [Sec. 100.4, RA 8293] (e) The license may be terminated upon proper showing that circumstances which led to its grant have ceased to exist and are unlikely to recur: Provided, That adequate protection shall be afforded to the legitimate interest of the licensee; [Sec. 100.5, RA 8293] (f) The patentee shall be paid adequate remuneration taking into account the economic value of the grant or authorization, except that in cases where the license was granted to remedy a practice which was determined after judicial or administrative process, to be anti-competitive, the need to correct the anti-competitive practice may be taken into account in fixing the amount of remuneration. [Sec. 100.6, RA 8293]

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(d) It must identify the letters patent involved by number and date and give the name of the owner of the patent and the title of the invention. In the case of an application for a patent, it should state the application number and the filing date of the application and give the name of the applicant and the title of the invention. If the assignment was executed concurrently with or subsequent to the execution of the application but before the application is filed or before its application number is ascertained, it should adequately identify the application by its date of execution, the name of the applicant, and the title of the invention. (e) It must be accompanied by the required fees. [Sec. 105; Rules and Regulations on Inventions, Rule 1200]

EFFECT OF NON-RECORDING OF ASSIGNMENT WITH THE IPO

The non-recording will not affect the binding agreement between the assignor and assignee. However, such registration would be necessary to bind third parties. An assignment would be void as against any subsequent purchaser or mortgagee for valuable consideration and without notice unless recorded in the IPO within 3 months from the date of the assignment or prior to the subsequent purchase or mortgage. [Sec. 106, RA 8293]

ASSIGNMENT AND TRANSMISSION OF RIGHTS ASSIGNMENT OF RIGHTS

The assignment may be of the entire patent or a portion thereof, or be limited to a specified territory. [Sec. 104, RA 8293]

TRANSMISSION OF RIGHTS:

 Patents or applications for patents and invention to which they relate, shall be protected in the same way as the rights of other property under the Civil Code. [Sec. 103.1, RA 8293]  Inventions and any right, title or interest in and to patents and inventions covered thereby, may be assigned or transmitted by inheritance or bequest or may be the subject of a license contract. [Sec. 103.2, RA 8293]

Trademarks DEFINITION OF MARKS, COLLECTIVE MARKS, TRADE NAMES Marks - Any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods [Sec. 121.1, RA 8293]

REQUIREMENTS FOR RECORDING OF ASSIGNMENT

(a) It must be in writing and accompanied by an English translation, if it is in a language other than English or Filipino (b) It must be notarized (c) It must be accompanied by an appointment of a resident agent, if the assignee is not residing in the Philippines

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Trademark

Service Mark

Any visible sign which is adopted and used to identify the source of origin of goods, and which is capable of distinguishing them from goods emanating from a competitor.

Any visible sign capable of distinguishing the services of an enterprise from the service of other enterprises.

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ACQUISITION OF OWNERSHIP OF MARK

 The rights to a mark shall be acquired through registration made validly in accordance with law. [Sec. 122, RA 8293]  A certificate of registration shall remain in force for 10 years [Sec. 145, RA 8293] and may be renewed for periods of 10 years at its expiration upon payment of the prescribed fee and upon filing of a request. [Sec 146, RA 8293]

Protection - Is not limited to similar marks but also products that may case insidious damage.

ACQUISITION OF OWNERSHIP OF TRADE NAME

Collective Marks - Any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods or services of different enterprises which use the sign under the control of the registered owner of the collective mark. [Sec. 121.2, RA 8293]

 Notwithstanding any laws or regulations providing for any obligation to register trade names, such names shall be protected, even prior to or without registration, against any unlawful act committed by third parties. [Sec. 165.2 (a), RA 8293) The ownership of a trade name is acquired through adoption and use.  A name or designation may not be used as a trade name if by its nature or the use to which such name or designation may be put, it is contrary to public order or morals and if, in particular, it is liable to deceive trade circles or the public as to the nature of the enterprise identified by that name. [Sec. 165.1, RA 8293]  Any change in the ownership of a trade name shall be made with the transfer of the enterprise or part thereof identified by that name. [Sec. 165.4, RA 8293]

Trade Name  The name or designation identifying or distinguishing an enterprise [Sec. 121.3, RA 8293].  Any individual name or surname, firm name, device or word used by manufacturers, industrialists, merchants, and others to identify their businesses, vocations or occupations. [Converse Rubber Corp. v. Universal Rubber Products, Inc. (1980)]

FUNCTIONS OF A TRADEMARK

NON-REGISTRABLE MARKS

(1) To point out distinctly the origin or ownership of the goods and to which it is affixed; (2) To secure him, who has been instrumental in bringing into the market a superior article of merchandise, the fruit of his industry and skill; (3) To assure the public that they are producing the genuine article; (4) To prevent fraud and imposition; and (5) To protect the manufacturer against substitution and sale of an inferior and different article as its product [Mirpuri v. CA (1998)]

A mark cannot be registered if it: (1) Consists of immoral, deceptive or scandalous matter, or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute; [Sec 123.1(a), RA 8293] (2) Consists of flags, coat of arms or other insignia of the Philippines or any foreign country; [Sec 123.1(b), RA 8293] (3) Consists of a name, portrait or signature identifying a particular living individual except by his written consent, or of a deceased President of the Philippines, during

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the life of his widow, except by written consent of the widow; [Sec 123.1(c), RA 8293] (4) Is identical with a registered mark of another or a mark with an earlier filing or priority date, in respect of: (a)The same goods or services, or (b) Closely related goods or services, or (c) If it nearly resembles such a mark as to be likely to deceive or cause confusion; [Sec 123.1(d), RA 8293] (5) Is identical with, or confusingly similar to, or constitutes a translation of a well-known mark, whether or not registered in the Philippines, and used for identical or similar goods or services; [Sec 123.1(e), RA 8293] (6) Is identical with, or confusingly similar to, or constitutes a translation of a well-known mark which is registered in the Philippines, and used for goods or services which are not similar; [Sec 123.1(f), RA 8293] (7) Likely to mislead the public, particularly as to the nature, quality, characteristics or geographical origin of the goods or services; [Sec 123.1(g), RA 8293] (8) Consists exclusively of signs that are generic for the goods or services that they seek to identify; [Sec 123.1(h), RA 8293] (9) Consists exclusively of signs or of indications that have become customary or usual to designate the goods or services in everyday language or in a bona fide and established trade practice; [Sec 123.1(i), RA 8293] (10) Consists exclusively of signs or of indications that may serve in trade to designate the kind, quality, quantity, intended purpose, value, geographical origin, time or production of the goods or rendering of the services, or other characteristics of the goods or services; [Sec 123.1(j), RA 8293] (11) Consists of shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that affect their intrinsic value; [Sec 123.1(k), RA 8293] (12) Consists of color alone, unless defined by a given form; [Sec 123.1(l), RA 8293] (13) Is contrary to public order or morality. [Sec 123.1(m), RA 8293]

continuous and exclusive use for 5 years, as used in connection with the applicant’s goods or services in commerce and in the mind of the public indicates a single source to consumers, it may be registered. The Office may accept as prima facie evidence that the mark has become distinctive, as used in connection with the applicant's goods or services in commerce, proof of substantially exclusive and continuous use thereof by the applicant in commerce in the Philippines for five (5) years before the date on which the claim of distinctiveness is made. [Sec 123.2, RA 8293]  The nature of the goods to which the mark is applied will not constitute an obstacle to registration. [Sec 123.3, RA 8293]

DOCTRINE MEANING

NON-USE OF MARK WHEN EXCUSED

OF

PRIOR USE OF MARK AS A REQUIREMENT USE OF MARK AS A REQUIREMENT

 The applicant or the registrant shall file a declaration of actual use of the mark with evidence to that effect, as prescribed by the Regulations within three (3) years from the filing date of the application. Otherwise, the application shall be refused or the mark shall be removed from the Register by the Director. [Sec. 124.2, RA 8293]  For the requirement of “actual use in commerce in the Philippines” before one may register a trademark, trade name and service mark under the law pertains to the territorial jurisdiction of the Philippines and is not only confined to a certain region, province, city or barangay. [McDonald’s Corporation v. MacJoy Fastfood (2007)]  Trademark is a creation of use and, therefore, actual use is a pre-requisite to exclusive ownership; registration is only an administrative confirmation of the existence of the right of ownership of the mark, but does not perfect such right; actual use thereof is the perfecting ingredient. [Shangri-La International Hotel v. DCC (2006)]

SECONDARY

(1)

 When the marks referred to in nos. 10, 11 and 12 has become distinctive, because of its long,

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owner. Lack of funds shall not excuse nonuse of a mark; [Sec. 152.1, RA 8293] (2) A use which does not alter its distinctive character though the use is different from the form in which it is registered. [Sec. 152.2, RA 8293] (3) Use of a mark in connection with one or more of the goods/services belonging to the class in which the mark is registered. [Sec. 152.3, RA 8293] (4) The use of mark by a company related to the applicant or registrant (5) The use of mark by a person controlled by the registrant. [Sec. 152.4, RA 8293]

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features of the mark. [Del Monte Corporation, et al. v. CA (1990)]  The dominancy test considers the dominant features in the competing marks in determining whether they are confusingly similar. Under the dominancy test, courts give greater weight to the similarity of the appearance of the product arising from the adoption of the dominant features of the registered mark, disregarding minor differences. Courts will consider more the aural and visual impressions created by the marks in the public mind, giving little weight to factors like prices, quality, sales outlets and market segments. [McDonald’s Corporation v. L.C. Big Mak Burger, Inc., et al. (2004)]

The use of a mark by a company related with the registrant or applicant shall inure to the latter's benefit, and such use shall not affect the validity of such mark or of its registration: Provided, that such mark is not used in such manner as to deceive the public. [Sec.152.4, RA 8293]

AS TO THE GOODS OR SERVICES IN CONNECTION WITH WHICH THE MARKS ARE USED (DOCTRINE OF RELATED GOODS/SERVICES)

(1) Goods are related when they belong to the same class or have the same descriptive properties or physical attributes, or they serve the same purpose or flow through the same channel of trade. (2) The use of identical marks on non-competing but related goods may likely cause confusion. (3) Corollarily, the use of identical marks on non-competing and unrelated goods is not likely to cause confusion.

TESTS TO DETERMINE CONFUSING SIMILARITY BETWEEN MARKS DOMINANCY TEST

Infringement is determined by the test of “dominancy” rather than by differences or variations in the details of one trademark and of another. Similarity in size, form and color, while relevant is not conclusive. If the competing trademark contains the main or essential or dominant features of another, and confusion is likely to result, infringement takes place. [Asia Brewery v. CA and San Miguel (1993)]

WELL-KNOWN MARKS

 A well-known mark is a mark which a competent authority of the Philippines has designated to be well-known internationally and in the Philippines.  In determining whether a mark is well-known, account shall be taken of the knowledge of the relevant sector of the public, rather than the public at large, including knowledge in the Philippines which has been obtained as a result of the promotion of the mark. [Sec 123.1(e), RA 8293]

HOLISTIC TEST

 To determine whether a trademark has been infringed, we must consider the mark as a whole and not as dissected. If the buyer is deceived, it is attributable to the marks as a totality, not usually to any part of it. The court therefore should be guided by its first impression, for the buyer acts quickly and is governed by a casual glance, the value of which may be dissipated as soon as the court assumed to analyze carefully the respective

DETERMINANTS CONCUR)

(NEED

NOT

(a) The duration, extent and geographical area of any use of the mark;

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(b) The market share in the Philippines and other countries of the goods/services to which the mark applies; (c) The degree of the inherent or acquired distinction of the mark; (d) The quality-image or reputation acquired by the mark; (e) The extent to which the mark has been registered in the world; (f) The exclusivity of the registration attained by the mark in the world; (g) The extent of use of the mark in the world; (h) The exclusivity of use in the world; (i) The commercial value attributed to the mark in the world; (j) The record of successful protection of the rights in the mark; (k) The outcome of litigations dealing with the issue of whether the mar is well-known; and (l) The presence or absence of identical or similar testmarks validly registered or used on other similar goods [Rule 102, Rule on Trademarks]

MERCANTILE LAW

application for registration of the same mark in one of those countries, shall be considered as filed as of the day the application was first filed in the foreign country. [Sec. 131.1, RA 8293]  No registration of a mark in the Philippines by a person described in this section shall be granted until such mark has been registered in the country of origin of the applicant. [Sec. 131.2, RA 8293] SIGNIFICANCE OF PRIORITY RIGHT A Philippine application filed by another applicant after the priority date but earlier than the foreign applicant’s actual filing may be refused registration if it is identical to the mark with a priority date. [The Law on Trademark, Infringement and Unfair Competition, Agpalo]

RIGHTS CONFERRED BY A WELLKNOWN MARK

(1) Right to be protected whether or not it is registered in the Philippines; (2) If registered under Sec 123.1(e), extension of protection to goods and services which are not similar to those in respect of which the mark is registered, provided that: (a) The use of the mark in relation to unrelated or dissimilar goods or services would indicate a connection between those goods or services and the owner of the mark; and (b) The interests of the owner of the registered mark are likely to be damaged by such use. [Sec. 147.2, RA 8293]

PROTECTION EXTENDED TO WELLKNOWN MARKS

IF NOT REGISTERED IN THE PHILIPPINES A mark cannot be registered if it is identical with or confusingly similar to, or constitutes a translation of a mark which is considered by the competent authority of the Philippines to be well-known internationally and in the Philippines, whether or not it is registered here, as being already the mark of a person other than the applicant for registration and used for identical goods or services. [(Sec 123.1(e), RA 8293]

RIGHTS CONFERRED REGISTRATION

IF REGISTERED IN THE PHILIPPINES A mark cannot be registered if it is identical with or confusingly similar to, or constitutes a translation of a mark considered well-known in accordance with the Sec. 123.1 (e), which is registered in the Philippines with respect to goods or services which are not similar to those with respect to which registration is applied for. [Sec 123.1(f), RA 8293]

BY

Except in cases of importation of drugs and medicines allowed under Section 72.1 of this Act and of off-patent drugs and medicines, the owner of a registered mark shall have the exclusive right to prevent all third parties not having the owner's consent from using in the course of trade identical or similar signs or containers for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion. In case of the use of an identical sign for identical goods or services, a likelihood of confusion shall

PRIORITY RIGHT.  An application for registration of a mark filed in the Philippines by a person referred to in Section 3, and who previously duly filed an

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be presumed. [Sec. 147.1, RA 8293 as amended by RA 9502]

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(5) Assignments and transfers shall have no effect against third parties until they are recorded at the Office. [Sec. 149.5, RA 8293]

LIMITATIONS ON SUCH RIGHTS

(1) Duration (except that, inasmuch as the registration of a trademark could be renewed every 10 years, a trademark could conceivably remain registered forever); (2) Territorial (except well-known marks).

Any license contract concerning the registration of a mark, or an application therefor, shall provide for effective control by the licensor of the quality of the goods or services of the licensee in connection with which the mark is used. If the license contract does not provide for such quality control, or if such quality control is not effectively carried out, the license contract shall not be valid. [Sec. 150.1, RA 8293]

Registration of the mark shall not confer on the registered owner the right to preclude third parties from using bona fide their names, addresses, pseudonyms, a geographical name, or exact indications concerning the kind, quality, quantity, destination, value, place of origin, or time of production or of supply, of their goods or services: Provided, That such use is confined to the purposes of mere identification or information and cannot mislead the public as to the source of the goods or services. [Sec. 148, RA 8293]

PROTECTION LIMITED TO GOODS SPECIFIED IN REGISTRATION CERTIFICATE

The certificate of registration can confer upon the petitioner the exclusive right to use its own symbol only to those goods specified in the certificate, subject to any conditions a limitations stated therein. One who has adopted and used a trademark on his goods does not prevent the adoption and use of the same trademark by others for products which are of a different description. [Faberge, Inc. v. IAC and Co Beng Kay (1992)]

ASSIGNMENT AND TRANSFER OF APPLICATION AND REGISTRATION

(1) An application for registration of a mark, or its registration, may be assigned or transferred with or without the transfer of the business using the mark. [Sec. 149.1, RA 8293] (2) Such assignment or transfer shall, however, be null and void if it is liable to mislead the public, particularly as regards the nature, source, manufacturing process, characteristics, or suitability for their purpose, of the goods or services to which the mark is applied. [Sec. 149.2, RA 8293] (3) The assignment of the application for registration of a mark, or of its registration, shall be in writing and require the signatures of the contracting parties. Transfers by mergers or other forms of succession may be made by any document supporting such transfer. [Sec. 149.3, RA 8293] (4) Assignments and transfers of registrations of marks shall be recorded at the Office on payment of the prescribed fee; assignment and transfers of applications for registration shall, on payment of the same fee, be provisionally recorded, and the mark, when registered, shall be in the name of the assignee or transferee. [Sec. 149.4, RA 8293]

USE BY THIRD PARTIES OF NAMES, ETC. SIMILAR TO REGISTERED MARK

The IPC deems unlawful any subsequent use of the trade name by a third party, whether as a trade name or a mark or collective mark, or any such use of a similar trade name or mark, likely to mislead the public. [Sec. 165.2 (b), RA 8293]

INFRINGEMENT AND REMEDIES TRADEMARK INFRINGEMENT

Any person who shall, without the consent of the owner of the registered mark: (1) Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark or the same container or a dominant feature thereof in connection with the sale, offering for sale, distribution, advertising of any goods or services including other preparatory steps necessary to carry out the sale of any goods or services on or in

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connection with which such use is likely to cause confusion, or to cause mistake, or to deceive; [Sec. 155.1, RA 8293] (2) Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature thereof and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used in commerce upon or in connection with the sale, offering for sale, distribution, or advertising of goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive. [Sec. 155.2, RA 8293]

MERCANTILE LAW

 In order to bring a civil action for infringement, it is not required that there is an actual sale of the goods or services using the infringing material. [Sec. 155.2, RA 8293] Infringement takes place upon the mere use or reproduction of the registered mark.  No article of imported merchandise which shall copy or simulate the name of any domestic product, or manufacturer, or dealer, or which shall copy or simulate a mark registered in accordance with the provisions of this Act, or shall bear a mark or trade name calculated to induce the public to believe that the article is manufactured in the Philippines, or that it is manufactured in any foreign country or locality other than the country or locality where it is in fact manufactured, shall be admitted to entry at any customhouse of the Philippines. [Sec. 166, RA 8293]  A mere distributor and not the owner cannot assert any protection from trademark infringement as it had no right in the first place to the registration of the disputed trademarks. [Superior Commercial Enterprises v. Kunnan Enterprises (2010)]

Mighty Corporation v. E. & J. Gallo Winery (2004): A crucial issue in any trademark infringement case is the likelihood of confusion, mistake or deceit as to the identity, source or origin of the goods or identity of the business as a consequence of using a certain mark. Likelihood of confusion is admittedly a relative term, to be determined rigidly according to the particular (and sometimes peculiar) circumstances of each case. In determining likelihood of confusion, the court must consider: (a) the resemblance between the trademarks; (b) the similarity of the goods to which the trademarks are attached; (c) the likely effect on the purchaser; and (d) the registrant’s express or implied consent and other fair and equitable considerations.

FALSE DESIGNATIONS OF ORIGIN; FALSE DESCRIPTION OR REPRESENTATION

Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which: (a) Is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person; [Sec. 169.1(a), RA 8293] (b) In commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person's goods, services, or commercial activities, shall be liable to a civil action for damages and injunction [Sec. 169.1 (b), RA 8293]

McDonald’s Corporation v. L.C. Big Mak Burger, Inc., et al., (2004): To establish trademark infringement, the following elements must be shown: (1) the validity of the mark; (2) the plaintiff’s ownership of the mark; and (3) the use of the mark or its colorable imitation by the alleged infringer results in “likelihood of confusion.” Of these, it is the element of likelihood of confusion that is the gravamen of trademark infringement. Two types of confusion arise from the use of similar or colorable imitation marks, namely, confusion of goods (product confusion) and confusion of business (source or origin confusion). While there is confusion of goods when the products are competing, confusion of business exists when the products are non-competing but related enough to produce confusion or affiliation.

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be readily ascertained with reasonable certainty, then the court may award as damages a reasonable percentage based upon the amount of gross sales of the defendant or the value of the services in connection with which the mark or trade name was used in the infringement of the rights of the complaining party. [Sec. 156.1, RA 8293]  The owner of the registered mark shall not be entitled to recover profits or damages unless the acts have been committed with knowledge that such imitation is likely to cause confusion, or to cause mistake, or to deceive. Such knowledge is presumed if the registrant gives notice that his mark is registered by displaying with the mark the words '"Registered Mark" or the letter R within a circle or if the defendant had otherwise actual notice of the registration. [Sec. 158, RA 8293]  Should damages be recoverable, the measure of the damages suffered shall be either: (a)The reasonable profit which the complaining party would have made, had the defendant not infringed his rights; or (b) The profit which the defendant actually made out of the infringement; or (c) A reasonable percentage based upon the amount of gross sales of the defendant or the value of the services in connection with which the mark or trade name was used in the infringement of the rights of the complaining party if such measure of damages cannot be readily ascertained with reasonable certainty. [Sec. 156.1, RA 8293]

Any goods marked or labeled in contravention of the provisions of this Section shall not be imported into the Philippines or admitted entry at any customhouse of the Philippines. The owner, importer, or consignee of goods refused entry at any customhouse under this section may have any recourse under the customs revenue laws or may have the remedy given by this Act in cases involving goods refused entry or seized. [Sec. 169.2, RA 8293]

INFRINGEMENT OF NAME AND MARKS OF OWNERSHIP STAMP ON CONTAINERS

General Rule:  It is unlawful for any person, without the consent of the manufacturer, bottler or seller who has registered the mark of ownership to fill such bottles, boxes, kegs, barrels or other containers so marked and stamped, for the purpose of sale, dispose of, or wantonly destroy the same, whether filled or not, to use the same for drinking vessels or drain pipes, foundation pipes, for any other purpose than that registered. [Sec. 2, RA 623 as amended by RA 5700]  The use of the same without apparent permission from the trademark owners thereof shall be prima facie presumption that such possession or use is unlawful. [Sec. 3, RA 623 as amended by RA 5700] Exceptions: (1) Use of the bottles as containers for sisi, bagoong, patis, and similar native products [Sec. 6 RA 623 as amended by RA 5700] (2) Persons in whose favor the containers were sold [Distelleria Washington v. LA Tondena Distillers (1997)]

REQUIREMENT OF NOTICE

Notice of registration of trademark is necessary for an owner of a trademark to recover damages in an action for infringement since knowledge that such imitation is likely to cause confusion, or to cause mistake, or to deceive is an element of infringement. Requirement of notice may be complied by displaying with the mark the words '"Registered Mark" or the letter R within a circle. [Sec. 158, RA 8293]

DAMAGES

 The owner of a registered mark may recover damages from any person who infringes his rights, and the measure of the damages suffered shall be either the reasonable profit which the complaining party would have made, had the defendant not infringed his rights, or the profit which the defendant actually made out of the infringement, or in the event such measure of damages cannot

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injunction against the presentation of such advertising matter in future issues of such newspapers, magazines, or other similar periodicals or in future transmissions of such electronic communications. The limitations shall apply only to innocent infringers: Provided, That such injunctive relief shall not be available to the owner of the right infringed with respect to an issue of a newspaper, magazine, or other similar periodical or an electronic communication containing infringing matter where restraining the dissemination of such infringing matter in any particular issue of such periodical or in an electronic communication would delay the delivery of such issue or transmission of such electronic communication is customarily conducted in accordance with the sound business practice, and not due to any method or device adopted to evade this section or to prevent or delay the issuance of an injunction or restraining order with respect to such infringing matter. [Sec. 159.3, RA 8293] (4) There shall be no infringement of trademarks or tradenames of imported or sold drugs and medicines allowed under Section 72.1 as well as imported or sold offpatent drugs and medicines: Provided, That said drugs and medicines bear the registered marks that have not been tampered, unlawfully modified, or infringed upon as defined under Section 155. [Sec. 159.4 RA 8293 as amended by RA 9502]

OTHER REMEDIES AVAILABLE: (1) Injunction [Sec. 156.4]; (2) Impounding of sales invoices and other documents [Sec. 156.2]; (3) Double damages in case of actual intent to defraud or to mislead [Sec. 156.3]; (4) Court order for the disposal or destruction of the infringing goods [Sec. 157]; (5) Criminal Action; (6) Administration sanctions Any foreign national, who qualifies under the principle on reciprocity and does not engage in business in the Philippines, whether or not it is licensed to do business in the Philippines, may bring civil or administrative action for: (1) Opposition (2) Cancellation (3) Infringement (4) Unfair Competition (5) False designation of origin or false description [Sec. 160. RA 8293]

LIMITATIONS TO INFRINGEMENT

ACTIONS

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FOR

The remedies given to the owner of a right infringed shall be limited as follows: (1) Registered mark shall have no effect against any person who, in good faith, before the filing date or the priority date, was using the mark for the purposes of his business or enterprise: Provided, That his right may only be transferred or assigned together with his enterprise or business or with that part of his enterprise or business in which the mark is used. [Sec. 159.1, RA 8293] (2) Where an infringer who is engaged solely in the business of printing the mark or other infringing materials for others is an innocent infringer, the owner of the right infringed shall be entitled as against such infringer only to an injunction against future printing. [Sec. 159.2, RA 8293] (3) Where the infringement complained of is contained in or is part of paid advertisement in a newspaper, magazine, or other similar periodical or in an electronic communication, the remedies of the owner of the right infringed as against the publisher or distributor of such newspaper, magazine, or other similar periodical or electronic communication shall be limited to an

UNFAIR COMPETITION

 A person who has identified in the mind of the public the goods he manufactures or deals in, his business or services from those of others, whether or not a registered mark is employed, has a property right in the goodwill of the said goods, business or services so identified, which will be protected in the same manner as other property rights. [Sec. 168.1, RA 8293]  Any person who shall employ deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services for those of the one having established such goodwill, or who shall commit any acts calculated to produce

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said result, shall be guilty of unfair competition, and shall be subject to an action therefor. [Sec. 168.2, RA 8293]  The following shall be deemed guilty of unfair competition: (a) Any person, who is selling his goods and gives them the general appearance of goods of another manufacturer or dealer, either as to the goods themselves or in the wrapping of the packages in which they are contained, or the devices or words thereon, or in any other feature of their appearance, which would be likely to influence purchasers to believe that the goods offered are those of a manufacturer or dealer, other than the actual manufacturer or dealer, or who otherwise clothes the goods with such appearance as shall deceive the public and defraud another of his legitimate trade, or any subsequent vendor of such goods or any agent of any vendor engaged in selling such goods with a like purpose; [Sec. 168.3(a), RA 8293] (b) Any person who by any artifice, or device, or who employs any other means calculated to induce the false belief that such person is offering the services of another who has identified such services in the mind of the public; [Sec. 168.3(b), RA 8293] (c) Any person who shall make any false statement in the course of trade or who shall commit any other act contrary to good faith of a nature calculated to discredit the goods, business or services of another. [Sec. 168.3(c), RA 8293]

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Caterpillar, Inc v. Samson (2006): An action for unfair competition is based on the proposition that no dealer in merchandise should be allowed to dress his goods in simulation of the goods of another dealer, so that purchasers desiring to buy the goods of the latter would be induced to buy the goods of the former. The most usual devices employed in committing this crime are the simulation of labels and the reproduction of form, color and general appearance of the package used by the pioneer manufacturer or dealer. Coca-Cola v. Gomez (2008): Articles 168.1 and 168.2 provide the concept and general rule on the definition of unfair competition. The law does not thereby cover every unfair act committed in the course of business; it covers only acts characterized by “deception or any other means contrary to good faith” in the passing off of goods and services as those of another who has established goodwill in relation with these goods or services, or any other act calculated to produce the same result. What unfair competition is, is further particularized under Section 168.3 when it provides specifics of what unfair competition is “without in any way limiting the scope of protection against unfair competition.” Part of these particulars is provided under Section 168.3(c) which provides the general “catch-all” phrase that the petitioner cites. Under this phrase, a person shall be guilty of unfair competition “who shall commit any other act contrary to good faith of a nature calculated to discredit the goods, business or services of another.”

McDonald’s Corporation v. L.G. Big Mak Burger, Inc., et al. (2004): The elements of an action for unfair competition are: (1) confusing similarity in the general appearance of the goods, and (2) intent to deceive the public and defraud a competitor. The confusing similarity may or may not result from similarity in the marks, but may result from other external factors in the packaging or presentation of the goods. The intent to deceive and defraud may be inferred from the similarity in appearance of the goods as offered for sale to the public. Actual fraudulent intent need not be shown.

From jurisprudence, unfair competition has been defined as the passing off (or palming off) or attempting to pass off upon the public the goods or business of one person as the goods or business of another with the end and probable effect of deceiving the public. It formulated the “true test” of unfair competition: whether the acts of defendant are such as are calculated to deceive the ordinary buyer making his purchases under the ordinary conditions which prevail in the particular trade to which the

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controversy relates. One of the essential requisites in an action to restrain unfair competition is proof of fraud; the intent to deceive must be shown before the right to recover can exist. The advent of the IP Code has not significantly changed these rulings as they are fully in accord with what Section 168 of the Code in its entirety provides. Deception, passing off and fraud upon the public are still the key elements that must be present for unfair competition to exist. Infringement of Trademark

occupations [Converse Rubber Corp. Universal Rubber Products, Inc. (1980)]

Unfair Competition

is Fraudulent essential

Prior registration of the Registration trademark is a necessary prerequisite to the action [In and Out Burger vs Sehwani (2008)]

intent is

v.

WHAT MAY NOT BE USED AS TRADE NAME

Unauthorized use of a Passing off of one’s trademark goods as those of another Fraudulent intent unnecessary

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is not

The law on unfair competition is broader and more inclusive than the law on trademark infringement. The latter is more limited but it recognizes a more exclusive right derived from the trademark adoption and registration by the person whose goods or business is first associated with it. Hence, even if one fails to establish his exclusive property right to a trademark, he may still obtain relief on the ground of his competitor’s unfairness or fraud. Conduct constitutes unfair competition if the effect is to pass off on the public the goods of one man as the goods of another. [Mighty Corporation v. E. & J. Gallo Winery (2004)]

(1) If by its nature or the use to which the name or designation may be put, it is contrary to public order or morals. (2) If it is liable to deceive trade circles or the public as to the nature of the enterprise identified by the name (3) If the trade name is similar to a mark or a trade name owned by another person and its use would likely mislead the public. [Sec.165.1, RA 8293] Acquisition of ownership: Trade names are protected even prior to or without registration. The ownership of a trade name is acquired through adoption and use. Right of owner: The IPC deems unlawful any subsequent use of the trade name by a third party, whether as a trade name or a mark or collective mark, or any such use of a similar trade name or mark, likely to mislead the public. [Sec. 165.2 (b), RA 8293] Trade names, unlike trademarks, need not be registered with the IPO before an infringement suit may be filed by its owner against the owner of an infringing trademark. All that is required is that the trade name is previously used in trade or commerce in the Philippines. [Prosource International v. Horphag Research Management (2009)]

COLLECTIVE MARKS

 A Collective mark is any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods or services of different enterprises which use the sign under the control of the registered owner of the collective mark [Sec. 121.2, RA 8293]  An application for registration of a collective mark shall designate the mark as a collective mark and shall be accompanied by a copy of the agreement, if any, governing the use of the collective mark. [Sec. 167.2, Ra 8293]

TRADE NAMES OR BUSINESS NAMES

 It is the name or designation identifying or distinguishing an enterprise. [Sec. 121.3, RA 8293]  Any individual name or surname, firm name, device or word used by manufacturers, industrialists, merchants, and others to identify their businesses, vocations or

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GROUNDS FOR CANCELLATION In addition to the grounds under Section 149, the Court shall cancel the registration of a collective mark if the person requesting the cancellation proves: (1) That only the registered owner uses the mark; or (2) That he uses or permits its use in contravention of the agreements referred to in Subsection 166.2; or (3) That he uses or permits its use in a manner liable to deceive trade circles or the public as to the origin or any other common characteristics of the goods or services concerned. [Sec. 167.3, RA 8293] The registration of a collective mark, or an application therefor shall not be the subject of a license contract. [Sec. 167.4, RA 8293]

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utilitarian aspects; thus, the article cannot be copyrighted.

PROTECTION EXTENDS ONLY TO THE EXPRESSION OF AN IDEA, NOT THE IDEA ITSELF.

No protection shall extend, under this law, to any idea, procedure, system method or operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodied in a work. [Sec 175, RA 8293]

THE COPYRIGHT IS DISTINCT FROM THE PROPERTY IN THE MATERIAL OBJECT SUBJECT TO IT. [Sec 181, RA 8293]

COPYRIGHT IS A STATUTORY RIGHT.

Copyright, in the strict sense of the term is purely a statutory right. Being a mere statutory grant, the rights are limited to what the statute confers. It may be obtained and enjoyed only with respect to the subjects and by the persons, and on terms and conditions specified in the statute. Accordingly, it can cover only the works falling within the statutory enumeration or description. [Pearl and Dean vs. Shoemart (2003)]

Copyrights DEFINITION Is that system of legal protection an author enjoys of the form of expression of ideas. [Aquino, Intellectual Property Law]

BASIC PRINCIPLES, SECTIONS 172.2, 175 AND 181

COPYRIGHTABLE WORKS

WORKS ARE PROTECTED BY THE SOLE FACT OF THEIR CREATION

Principle of Automatic Protection: Copyright is vested from the very moment of creation. [Sec. 172.2, RA 8293] The enjoyment and exercise of copyright, including moral rights, shall not be the subject of any formality; such enjoyment and such exercise shall be independent of the existence of protection in the country of origin of the work. [Article 5(2), Berne Convention for the Protection of Literary and Artistic Works] The Denicola Test in intellectual property law states that if design elements of an article reflect a merger of aesthetic and functional considerations, the artistic aspects of the work cannot be conceptually separable from the

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ORIGINAL LITERARY AND ARTISTIC WORKS Sec. 172.1, RA 8293. Literary and artistic works, hereinafter referred to as "works", are original intellectual creations in the literary and artistic domain protected from the moment of their creation and shall include in particular: (a) Books, pamphlets, articles and other writings; (b) Periodicals and newspapers; (c) Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not reduced in writing or other material form; (d) Letters; (e) Dramatic or dramatico-musical compositions; choreographic works or entertainment in dumb shows; (f) Musical compositions, with or without words;

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 Originality is not determined by novelty, aesthetic merit or ingenuity but that it is an independent creation.  The requirement in US Law that the expression should be fixed in a tangible medium is not applicable here since our law expressly provides that works are protected irrespective of their mode or form of expression. [Sec. 172.2, RA 8293]

(g) Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; models or designs for works of art; (h) Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art; (i) Illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography, architecture or science; (j) Drawings or plastic works of a scientific or technical character; (k) Photographic works including works produced by a process analogous to photography; lantern slides; (l) Audiovisual works and cinematographic works and works produced by a process analogous to cinematography or any process for making audio-visual recordings; (m) Pictorial illustrations and advertisements; (n) Computer programs; and (o) Other literary, scholarly, scientific and artistic works

DERIVATIVE WORKS

The following derivative works shall also be protected by copyright: (a) Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary or artistic works; and (b) Collections of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents. [Sec. 173.1, RA 8293] DERIVATIVE WORKS ARE PROTECTED AS NEW WORKS PROVIDED THEY SHALL NOT: (a) Affect the force of any subsisting copyright upon the original works employed or any part thereof; or (b) Be construed to imply any right to such use of the original works, or to secure or extend copyright in such original works. [Sec. 173.2, RA 8293]

WHEN A WORK IS CONSIDERED ORIGINAL: (a) The work is an independent creation of the author; and (b) It must not be copied from the work of another.  A person to be entitled to a copyright must be the original creator of the work. He must have created it by his own skill, labor and judgment without directly copying or evasively imitating the work of another. [Ching Kian Chuan vs. CA (2001)]  By originality is meant that the material was not copied, and evidences at least minimal creativity; that it was independently created by the author and that it possesses at least some minimal degree of creativity. Copying is shown by proof of access to copyrighted material and substantial similarity between the two works. The applicant must thus demonstrate the existence and validity of copyright because in the absence of copyright protection, even the original creation may be freely copied. [Ching v. Salinas (2005)]

The provisions of the intellectual property code shall apply to works in which copyright protection obtained prior to the effectivity of the law is subsisting. provided that the application of the code shall not result in the diminution of such protection. [Sec. 239.3 IPC] Ching Kian Chuan vs CA 363 SCRA 142 (2001): (Vermicelli Case) A person entitled to copyright must be the original creator of the work. He must have created it by his own skill, labor, and judgment without directly copying or evasively imitating the work of another. Sambar vs Levi Strauss 378 SCRA 364 (2002): To be entitled to copyright, the thing being copyrighted must be original, created by the author through his own judgment without directly copying or evasively imitating the work of another.

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Exceptions: (1) When copyright is assigned or bequested in favor of the government [Sec 176.3]; (2) Author of speeches, lectures, sermons, addresses and dissertations shall have exclusive right of making a collection of his work.

NON-COPYRIGHTABLE WORKS UNPROTECTED SUBJECT MATTER

(a) Any idea, procedure, system method or operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodied in a work; (b) News of the day and other miscellaneous facts having the character of mere items of press information; (c) Any official text of a legislative, administrative or legal nature, as well as any official translation thereof; (d) Pleadings; (e) Original decisions of courts and tribunals (This pertains to the “original decisions” not the SCRA published volumes since these are protected under derivative works under Sec 173.1) [Sec. 175, RA 8293]

 However, prior approval of the government agency or the office wherein the work is created shall be necessary for the exploitation of such work for profit. [Sec. 176.1]  Notwithstanding the foregoing provisions, the Government is not precluded from receiving and holding copyrights transferred to it by assignment, bequest or otherwise; nor shall publication or republication by the Government in a public document of any work in which copyright is subsisting be taken to cause any abridgment or annulment of the copyright or to authorize any use or appropriation of such work without the consent of the copyright owner. [Sec. 176.3, RA 8293]  In writing judicial decisions, a judge should make the proper attribution in copying passages from any judicial decision, statute, regulation, or other Works of the Government. However, the failure to make such attribution does not violate the Law on Copyright. The law expressly provides that Works of the Government are not subject to copyright. This means that there is neither a legal right by anyone to demand attribution, nor any legal obligation from anyone to make an attribution, when Works of the Government are copied. The failure to make the proper attribution of a Work of the Government is not actionable but is merely a case of sloppy writing. Clearly, there is no legal obligation, by a judge or by any person, to make an attribution when copying Works of the Government. However, misquoting or twisting, with or without attribution, any judicial decision, statute, regulation or other Works of the Government in judicial writing, if done to mislead the parties or the public, is actionable. [J. Carpio Dissenting Opinion, In The Matter Of the Charges of Plagiarism, Etc., Against Assoc.

 The format or mechanics of a TV show is not copyrightable as copyright does not extend to ideas, procedures, processes, systems, methods of operation, concepts, principles or discoveries regardless of the form in which they are described, explained, illustrated or embodied. [Joaquin Jr. et al vs. Drilon, et al (1999)]  No one may claim originality as to facts as these do not owe their origin to an act of authorship. The first person to find and report a particular fact has not created the same; he has merely discovered its existence. [Feist Publication v Rural Telephone Services (1991)] WORKS OF THE GOVERNMENT OF THE PHILIPPINES - work created by an officer or employee of the Philippine Government or any of its subdivisions and instrumentalities, including government-owned or controlled corporations as a part of his regularly prescribed official duties. [Sec. 171.11, RA 8293] General Rule: copyright

Government

cannot

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own

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Justice Mariano Del Castillo, A.M. 10-7-17-SC (2011)]

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Copyright in a work of architecture - shall include the right to control the erection of any building which reproduces the whole or a substantial part of the work either in its original form or in any form recognizably derived from the original: Provided, That the copyright in any such work shall not include the right to control the reconstruction or rehabilitation in the same style as the original of a building to which that copyright relates. [Sec. 186, RA 8293]

WORKS OF THE PUBLIC DOMAIN These include works whose term of copyright has expired. USEFUL ARTICLES Useful Article Doctrine - Works whose sole purpose is utilitarian have no separate artistic value. This can be distinguished from a work of applied art, which has utilitarian functions but there is an identifiable artistic work or creation incorporated thereto.

Communication to the Public of Copyrighted Works - Includes point-to-point transmission of a work, including video on demand, and providing access to an electronic retrieval system, such as computer databases, servers, or similar electronic storage devices. Broadcasting, rebroadcasting, retransmission by cable, and broadcast and retransmission by satellite are all acts of “communication to the public” within the meaning of the IPC. [Rule 11, Copyright Safeguards and Regulations]

RIGHTS OF COPYRIGHT OWNER COPYRIGHT OR ECONOMIC RIGHTS

Copyright or economic rights shall consist of the exclusive right to carry out, authorize or prevent the following acts: (a) Reproduction of the work or substantial portion of the work; [Sec. 177.1, RA 8293] (b) Dramatization, translation, adaptation, abridgment, arrangement or other transformation of the work; [Sec. 177.2, RA 8293] (c) The first public distribution of the original and each copy of the work by sale or other forms of transfer of ownership; [Sec. 177.3, RA 8293] (d) Rental of the original or a copy of an audiovisual or cinematographic work, a work embodied in a sound recording, a computer program, a compilation of data and other materials or a musical work in graphic form, irrespective of the ownership of the original or the copy which is the subject of the rental; [Sec. 177.4, RA 8293] (e) Public display of the original or a copy of the work; [Sec. 177.5, RA 8293] (f) Public performance of the work; [Sec. 177.6, RA 8293] (g) Other communication to the public of the work [Sec. 177.7, RA 8293]

First Public Distribution of Work- An exclusive right of first distribution of work includes all acts involving distribution, specifically including the first importation of an original and each copy of the work into the jurisdiction of the Republic of the Philippines. [Rule 12, Copyright Safeguards and Regulations]

CIVIL CODE PROVISIONS ON OWNERSHIP OF INTELLECTUAL CREATION: Article 721. By intellectual creation, the following persons acquire ownership: (1) The author with regard to his literary, dramatic, historical, legal, philosophical, scientific or other work; (2) The composer; as to his musical composition; (3) The painter, sculptor, or other artist, with respect to the product of his art; (4) The scientist or technologist or any other person with regard to his discovery or invention.

Economic rights also give the author the right to assign or license the copyright and/or the material object in whole or in part, and they allow the owner to derive financial reward from the use of his works by others. [Sec. 180.1, RA 8293 as amended by RA 10372]

Article 722. The author and the composer, mentioned in Nos. 1 and 2 of the preceding article, shall have the ownership of their creations even before the publication of the

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same. Once their works are published, their rights are governed by the Copyright laws.

right of making a collection of his works. [Sec. 176.2, RA 8293]

The painter, sculptor or other artist shall have dominion over the product of his art even before it is copyrighted. The scientist or technologist has the ownership of his discovery or invention even before it is patented.

WAIVER OF MORAL RIGHTS General Rule: Moral rights can be waived in writing, expressly stating such waiver [Sec. 195, RA 8293] or by contribution to a collective work unless such is expressly reserved [Sec. 196, RA 8293].

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

MORAL RIGHTS [SEC. 193]

The author of a work shall, independently of the economic rights in Section 177 or the grant of an assignment or license with respect to such right, have the right: (1) To require that the authorship of the works be attributed to him, in particular, the right that his name, as far as practicable, be indicated in a prominent way on the copies, and in connection with the public use of his work; [Sec. 193.1, RA 8293] (2) To make any alterations of his work prior to, or to withhold it from publication; [Sec. 193.2, RA 8293] (3) To object to any distortion, mutilation or other modification of, or other derogatory action in relation to, his work which would be prejudicial to his honor or reputation; [Sec. 193.3, RA 8293] (4) To restrain the use of his name with respect to any work not of his own creation or in a distorted version of his work. [Sec. 193.4, RA 8293]  In addition to the right to publish granted by the author, his heirs, or assigns, the publisher shall have a copyright consisting merely of the right of reproduction of the typographical arrangement of the published edition of the work. [Sec.174, RA 8293]  The author of speeches, lectures, sermons, addresses, and dissertations mentioned in the preceding paragraphs shall have the exclusive

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Exceptions: Even if made in writing, waiver is still not valid if: (a) Use of the name of the author, title of his work, or his reputation with respect to any version or adaptation of his work, which because of alterations substantially tends to injure the literary or artistic reputation of another author; [Sec. 195.1, RA 8293] (b) It uses the name of the author in a work that he did not create. [Sec. 195.1, RA 8293]  Moral rights are not assignable or subject to license. [Sec. 198, RA 8293]  The right of an author under Section 193.1. shall last during the lifetime of the author and in perpetuity after his death while the rights under Sections 193.2. 193.3. and 193.4. shall be coterminous with the economic rights [Sec. 198, RA 8293 as amended by RA 10372]

RIGHTS TO PROCEEDS IN SUBSEQUENT TRANSFERS (DROIT DE SUITE OR FOLLOW UP RIGHTS)

In every sale or lease of an original work of painting or sculpture or of the original manuscript of a writer or composer, subsequent to the first disposition thereof by the author, the author or his heirs shall have an inalienable right to participate in the gross proceeds of the sale or lease to the extent of five percent (5%). This right shall exist during the lifetime of the author and for fifty (50) years after his death. [Sec. 200, RA 8293] Works not covered - Prints, etchings, engravings, works of applied art, or works of similar kind wherein the author primarily derives gain from the proceeds of reproductions. (Sec. 201, RA 8293) First Sale Doctrine - After the first sale of the lawfully made copy of the copyrighted work,

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anyone who is the owner of that copy can sell or dispose of that copy in any way without any liability for copyright infringement. The first sale of an authorized copy of the work exhausts the author’s right to control distribution of copies.

NEIGHBORING RIGHTS PERFORMER’S RIGHTS (1) As regards their performances, the right of authorizing: (a) The broadcasting and other communication to the public of their performance; and (b) The fixation of their unfixed performance. [Sec. 203.1, RA 8293] (2) Such right shall be maintained and exercised fifty (50) years after his death, by his heirs, and in default of heirs, the government, where protection is claimed. [Sec. 204.2, RA 8293] (3) The right of authorizing the direct or indirect reproduction of their performances fixed in sound recordings, or audiovisual works or fixations in any manner or form; [Sec. 203.2, RA 8293, as amended by 10372] (4) Subject to the provisions of Section 206, the right of authorizing the first public distribution of the original and copies of their performance fixed in the sound recording or audiovisual works or fixations through sale or rental or other forms of transfer of ownership; [Sec. 203.3, RA 8293, as amended by RA 10372] (5) The right of authorizing the commercial rental to the public of the original and copies of their performances fixed in sound recordings or audiovisual works or fixations, even after distribution of them by, or pursuant to the authorization by the performer; [Sec. 203.4, RA 8293, as amended by RA 10372] (6) The right of authorizing the making available to the public of their performances fixed in sound recordings or audiovisual works or fixations, by wire or wireless means, in such a way that members of the public may access them from a place and time individually chosen by them. [Sec. 203.5, RA 8293, as amended by RA 10372] (7) Independently of a performer's economic rights, the performer, shall, as regards his

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live aural performances or performances fixed in sound recordings or audiovisual works or fixations, have the right to claim to be identified as the performer of his performances, except where the omission is dictated by the manner of the use of the performance, and to object to any distortion, mutilation or other modification of his performances that would be prejudicial to his reputation. [Sec. 204.1, RA 8293, as amended by RA 10372] (8) Unless otherwise provided in the contract, in every communication to the public or broadcast of a performance subsequent to the first communication or broadcast thereof by the broadcasting organization, the performer shall be entitled to an additional remuneration equivalent to at least five percent (5%) of the original compensation he or she received for the first communication or broadcast. [Sec. 206, RA 8293] RIGHTS OF PRODUCERS OF SOUND RECORDING (1) The right to authorize the direct or indirect reproduction of their sound recordings, in any manner or form; the placing of these reproductions in the market and the right of rental or lending; [Sec. 208.1, RA 8293] (2) The right to authorize the first public distribution of the original and copies of their sound recordings through sale or rental or other forms of transferring ownership; [Sec. 208.2, RA 8293] (3) The right to authorize the commercial rental to the public of the original and copies of their sound recordings, even after distribution by them by or pursuant to authorization by the producer. [Sec. 208.3, RA 8293] (4) If a sound recording published for commercial purposes, or a reproduction of such sound recording, is used directly for broadcasting or for other communication to the public, or is publicly performed with the intention of making and enhancing profit, a single equitable remuneration for the performer or performers, and the producer of the sound recording shall be paid by the user to both the performers and the producer,

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who, in the absence of any agreement shall share equally. [Sec. 209, RA 8293]

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producing in the air sound waves which are heard as a music… and if the instrument he plays on is a piano plus a broadcasting apparatus, so that the waves are thrown out, not only upon the air but upon others, then he also performing a musical composition. In relation thereto it has been held that the playing of music in dine and dance establishments which was paid for by the public in purchases of food and drink constitute performance for public. The music provided for is for the purpose of entertaining and amusing customers in order to make the establishment more attractive and desirable. The expenses entailed thereby are added to the overhead of the restaurant which are either eventually charged to the price of the food and drink or the overall total of additional income produced by the bigger volume of business which the entertainment was programmed to attract. Nevertheless, the there is no infringement of copyright law as the composers in this case waived their right in favour of the public when they allowed their intellectual creations to become property of public domain.

RIGHTS OF BROADCASTING ORGANIZATIONS (1) The rebroadcasting of their broadcasts; [Sec. 211.1, RA 8293] (2) The recording in any manner, including the making of films or the use of video tape, of their broadcasts for the purpose of communication to the public of television broadcasts of the same; [Sec. 211.2, RA 8293] (3) The use of such records for fresh transmissions or for fresh recording. [Sec. 211.3, RA 8293] Must-Carry Rule: Prevents cable television companies from excluding broadcasting organization especially in those places not reached by signal. Also, the rule prevents cable television companies from depriving viewers in far-flung areas the enjoyment of programs available to city viewers. [ABS-CBN Broadcasting vs. Philippine Multi-Media System (2009)] LIMITATIONS ON PROTECTION Sections 203, 208 and 209 shall not apply where the acts referred to in those Sections are related to: (1) The use by a natural person exclusively for his own personal purposes; (2) Using short excerpts for reporting current events; (3) Use solely for the purpose of teaching or for scientific research; and (4) Fair use of the broadcast subject to certain conditions. (Sec. 212, RA 8293)

TERM OF PROTECTION Works

Term

For performances not Fifty (50) years from incorporated in the end of the year in recordings which the performance took place [Sec. 215.1(a), RA 8293]

Filipino Society of Composers vs Benjamin Tan 148 SCRA 461 (1987): The issue in this case as WON the playing and signing of musical compositions which have been copyrighted under the provisions of the copyright law inside the restaurant constitute a performance for profit? The court ruled that the word “perform” as used in the ACT has been applied to one who plays a musical composition on a piano, thereby

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For sound or image and sound recordings and for performances incorporated therein

Fifty (50) years from the end of the year in which the recording took place. [Sec. 215.1(b), RA 8293]

Broadcasts

Twenty (20) years from the date the broadcast took place [Sec. 215.2, RA 8293]

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RULES ON OWNERSHIP OF COPYRIGHT OWNERSHIP OF COPYRIGHT Work

Ownership

Single Creator of an Belongs to the author of the work [Sec. 178.1, RA 8293] Original Work Works of Authorship

Belongs of the co-authors; in the absence of agreement, their rights shall be Joint governed by the rules on co-ownership. However, if the work consists of parts that can be used separately and identified, the author of each part owns the copyright of the part he has created. [Sec. 178.2, RA 8293; Asked in ‘95, ‘04]

Belongs to the employee if the creation is not a part of his regular duties, even if Work created during he used the time, facilities and materials of the employer. However, belongs to the the course of employer if the work is in the performance of the employee’s regular duties unless employment there is an agreement to the contrary. [Sec. 178.3, RA 8293; Asked in ‘08] Work commissioned The person who commissioned the work holds ownership of the work per se, but by a person other copyright remains with the creator unless there was a stipulation to the contrary. than the employer [Sec. 178.4, RA 8293; Asked in ‘95, ‘04]

Audio visual works

Belongs to the producer, author of the scenario, composer of the music, film director, and author of the adapted work. However, subject to stipulations, the producers shall exercise the copyright as may be required for the exhibition of the work, except for the right to collect license fees for the performance of musical compositions in the work. [Sec. 178.5, RA 8293]

Letters

Belongs to the writer, but the court may authorize their publication or dissemination of the public good or interest of justice requires, pursuant to Art. 723, New Civil Code. [Sec. 178.6, RA 8293]

Publishers are deemed to represent the authors, unless the contrary appears, the Anonymous and pseudonyms or adopted names leave no doubt as to the author’s identity or if the pseudonymous works author discloses his identity. [Sec. 179, RA 8293] Collective works

A contributor is deemed to have waived his right unless he expressly reserves it. [Sec. 196, RA 8293]

DURATION OF COPYRIGHT Works

Term

Original Literary and Artistic Works Lifetime of author and for fifty (50) years after his death (Sec including Posthumous Works 213.1, RA 8293) Derivative Works including Posthumous Lifetime of author and for fifty (50) years after his death [Sec Works 213.1, RA 8293] Joint Authorship

Lifetime of the last surviving author and for fifty (50) years after his death (Sec 213.2, RA 8293)

Anonymous or Pseudonymous Works

Fifty (50) years from date of first lawful publication [Sec. 213.3, RA 8293]

Applied Art

Twenty-five (25) years from date of making [Sec. 213.4, RA 8293]

Published Photographic Works

Fifty (50) years from publication [Sec. 213.5, RA 8293]

Unpublished Photographic Works

Fifty (50) years from the making [Sec. 213.5, RA 8293]

Published Audio-visual Works

Fifty (50) years from publication [Sec. 213.6, RA 8293]

Unpublished Audio-visual Works

Fifty (50) years from the making [Sec. 213.6, RA 8293] PAGE 247

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PRESUMPTION OF AUTHORSHIP The natural person whose name is indicated on a work in the usual manner as the author shall, in the absence of proof to the contrary, be presumed to be the author of the work. This provision shall be applicable even if the name is a pseudonym, where the pseudonym leaves no doubt as to the identity of the author. The person or body, corporate whose name appears on an audio-visual work in the usual manner shall, in the absence of proof to the contrary, be presumed to be the maker of said work. [Sec. 219, RA 8293] The term of protection subsequent to the death of the author shall run from the date of his death or of publication, but such terms shall always be deemed to begin on the first day of January of the year following the event which gave rise to them. [Sec. 214, RA 8293]

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imply transfer, assignment or licensing of the copyright. [Sec. 181, RA 8293 as amended by RA 10372]  The owners of copyright and related rights or their heirs may designate a society of artists, writers, composers and other right-holders to collectively manage their economic or moral rights on their behalf. For the said societies to enforce the rights of their members, they shall first secure the necessary accreditation from the Intellectual Property Office. [Sec. 183, RA 8293 as amended by RA 10372]

LIMITATIONS ON COPYRIGHT DOCTRINE OF FAIR USE

 The fair use of copyrighted work for criticism, news reporting, teaching (including multiple copies for classroom use), research and similar purposes is not an infringement of copyright.  A privilege, in persons other than the owner of the copyright, to use the copyrighted material in a reasonable manner without his consent, notwithstanding the monopoly granted to the owner by the copyright. It is meant to balance the monopolies enjoyed by the copyright owner with the interests of the public and of society.

TRANSFER OR ASSIGNMENT OF COPYRIGHT

 The copyright may be assigned or licensed in whole or in part. Within the scope of the assignment or license, the assignee or licensee is entitled to all the rights and remedies which the assignor or licensor had with respect to the copyright. [Sec. 180.1, RA 8293 as amended by RA 10372]  The copyright is not deemed assigned or licensed inter vivos in whole or in part unless there is a written indication of such intention. [Sec. 180.2, RA 8293 as amended by RA 10372]  The submission of a literary, photographic or artistic work to a newspaper, magazine or periodical for publication shall constitute only a license to make a single publication unless a greater right is expressly granted. If two (2) or more persons jointly own a copyright or any part thereof, neither of the owners shall be entitled to grant licenses without the prior written consent of the other owner or owners. [Sec. 180.3, RA 8293]  The copyright is distinct from the property in the material object subject to it. Consequently, the transfer, assignment or licensing of the copyright shall not itself constitute a transfer of the material object. Nor shall a transfer or assignment of the sole copy or of one or several copies of the work

Decompilation: Refers to the reproduction of the code and translation of the forms of the computer program to achieve the interoperability of an independently created computer program with other programs. This may also constitute fair use [Sec. 185.1, RA 8293]. The fact that a work is unpublished shall not by itself bar a finding of fair use if such finding is made upon consideration of all the above factors. [Sec 185.2, RA 8293] FACTORS TO CONSIDER IN DETERMINING FAIR USE (1) The purpose and character of the use, including whether such use is of a commercial nature or is for non-profit educational purposes; (2) The nature of the copyrighted work;

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(3) The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) The effect of the use upon the potential market for or value of the copyrighted work [Sec. 185.1, RA 8293; (Harper & Row v. Nation Enterprise, 471 US 539, 105 S.Ct. 2218, 85 L.Ed.2d 588]

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Habana et al vs. Robles et al. (1999): Infringement consists in the doing by any person, without the consent of the owner of the copyright, of anything the sole right to do which is conferred by statute on the owner of the copyright. For there to be substantial reproduction of a book, it does not necessarily require that the entire copyrighted work, or even a large portion of it, be copied. If so much is taken that the value of the original work is substantially diminished, there is an infringement of copyright and to an injurious extent, the work appropriated. It is no defense that the pirate did not know whether or not he was infringing any copyright; he at least knew that what he was copying was not his, and he copied at his peril. In cases of infringement, copying alone is not what is prohibited. The copying must produce an “injurious effect.”

Joaquin vs Drilon 302 SCRA 225 (1999): The format of a show is not copyrightable. Feist Publications Inc vs. Rural Tel Service 499 US 340 (1991): A compilation is not copyrightable per se, but it is copyrightable only if its facts have been selected, coordinated, or arranged in such a way that the resulting work as a while constitutes an original work of authorship. Otherwise known as the Sweat of the Brow or Industrious Collection Test. In the Matter of the Charges of Plagiarism etc Against Associate Justice Mariano C. Del Castillo AM No 10-7-17-SC (2011): An exception is carved out for lawyers and officers of the court against plagiarism when writing judicial documents that will be part of court record.

Copyright infringement and unfair competition are not limited to the act of selling counterfeit goods. They cover a whole range of acts from copying, assembling, packaging to marketing, including the mere offering for sale of counterfeit goods. [Microsoft Corp vs. Maxicorp Inc. (2004)]

COPYRIGHT INFRINGEMENT

Infringement of Copyright and Related Rights: means any violation of the rights under the Intellectual Property Code and/or the applicable Intellectual Property Law, including the act of any person who at the time when copyright subsists in a work has in his possession an article which he known, or ought to know, to be an infringing copy of the work f or the purpose of: (a) Selling, letting for hire, or by way of trade offering or exposing for sale, or hire, the article (b) Distributing the article for purpose of trade, or for any other purpose to an extent that will prejudice the rights of the copyright owner in the work; or (c) Trade exhibit of the article in public. [Sec. 1(l), Rule 1, Rules and Regulations on Administrative Complaints for Violation of Laws involving Intellectual Property Rights]

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Columbia Pictures v. CA (1996): A copy of a piracy is an infringement of the original, and it is no defense that the pirate, in such cases, did not know what works he was indirectly copying, or did not know whether or not he was infringing any copyright; he at least knew that what he was copying was not his, and he copied at his peril. In determining the question of infringement, the amount of matter copied from the copyrighted work is an important consideration. To constitute infringement, it is not necessary that the whole or even a large portion of the work shall have been copied. If so much is taken that the value of the original is sensibly diminished, or the labors of the original author are substantially and to an injurious extent appropriated by another, that is sufficient in point of law to constitute a piracy.

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THE FOLLOWING SHALL NOT CONSTITUTE INFRINGEMENT OF COPYRIGHT: (a) Recitation or performance of a work once it has been made accessible to the public if (1) privately done AND free of charge OR (2) strictly for a charitable or religious institution; [Sec. 184.1(a), RA 8293] (b) Making of quotations from a published work: (i) compatible with fair use, (ii) extent is justified by the purpose, (iii) source and name of the author, appearing on work, must be mentioned; [Sec. 184.1(b), RA 8293] (c) Reproduction or communication to the public by mass media of articles on current political, social, economic, scientific or religious topic, lectures, addresses and other works, delivered in public: (i) for information purposes, (ii) not expressly reserved, and (iii) source is already indicated; [Sec. 184.1(c), RA 8293] (d) Reproduction and communication to the public of literary, scientific or artistic works as part of reports of current events by means of photography, cinematography or broadcasting to the extent necessary for the purpose; [Sec. 184.1(d), RA 8293] (e) Inclusion of a work in a publication, broadcast or other communication to the public, sound recording or film if made by way of illustration for teaching purposes compatible with fair use and the source and the name of the author appearing on work, must be mentioned; [Sec. 184.1(e), RA 8293] (f) Recording made in schools, universities, or educational institutions of a work included in a broadcast for the use of schools, universities or educational institutions. Such recording must be deleted within a reasonable period; such recording may not be made from audio-visual works which are part of the general cinema, repertoire of feature films except of brief excerpts of the work; [Sec. 184.1(f), RA 8293] (g) Making of ephemeral recordings; (i) by a broadcasting organization, (ii) by means of its work or facilities, (iii) for use in its own broadcast; [Sec. 184.1(g), RA 8293] (h) Use made of a work by or under the direction or control of the government for public

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interest compatible with fair use; [Sec. 184.1(h), RA 8293] (i) Public performance or the communication to the public of a work in a place where no admission fee is charged by a club on institution for charitable or educational purpose only and the aim is not profitmaking; [Sec. 184.1(i), RA 8293] (j) Public display of the original or a copy of the work not made by means of a film, slide, television, image or otherwise on screen or by means of any other device or process either the work has been published, sold, given away, or transferred to another person by the author or his successor in title; [Sec. 184.1(j), RA 8293] (k) Use made of a work for the purpose of any judicial proceedings or for the giving of professional advice by a legal practitioner. [Sec. 184.1(k), RA 8293] (l) The reproduction or distribution of published articles or materials in a specialized format exclusively for the use of the blind, visuallyand reading-impaired persons: Provided, That such copies and distribution shall be made on a nonprofit basis and shall indicate the copyright owner and the date of the original publication. [Sec. 184.1(l), RA 8293 as amended by RA 10372] REPRODUCTION OF PUBLISHED WORK General Rule: The private reproduction of a published work in a single copy, where the reproduction is made by a natural person exclusively for research and private study, shall be permitted, without the authorization of the owner of copyright in the work. [Sec. 187.1, RA 8293] Exceptions: Such permission shall not extend to: (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 in graphic form by reprographic means; (c) A compilation of data and other materials; (d) A computer program except as provided in Section 189; and (e) Any work in cases where reproduction would unreasonably conflict with a normal exploitation of the work or would otherwise

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unreasonably prejudice the legitimate interests of the author. [187.2, RA 8293]

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and to the extent, for which the computer program has been obtained; and (b) Archival purposes, and, for the replacement of the lawfully owned copy of the computer program in the event that the lawfully obtained copy of the computer program is lost, destroyed or rendered unusable. [Sec. 189.1, RA 8293]

REPROGRAPHIC REPRODUCTION BY LIBRARIES Any library or archive whose activities are not for profit may, without the authorization of the author of copyright owner, make a single copy of the work by reprographic reproduction: (a) Where the work by reason of its fragile character or rarity cannot be lent to user in its original form; (b) Where the works are isolated articles contained in composite works or brief portions of other published works and the reproduction is necessary to supply them, when this is considered expedient, to persons requesting their loan for purposes of research or study instead of lending the volumes or booklets which contain them; (c) Where the making of such a copy is in order to preserve and, if necessary in the event that it is lost, destroyed or rendered unusable, replace a copy, or to replace, in the permanent collection of another similar library or archive, a copy which has been lost, destroyed or rendered unusable and copies are not available with the publisher. [Sec. 188.1, RA 8293]

No copy or adaptation mentioned in this Section shall be used for any purpose other than the ones determined in this Section, and any such copy or adaptation shall be destroyed in the event that continued possession of the copy of the computer program ceases to be lawful. [Sec. 189.2, RA 8293] IMPORTATION FOR PERSONAL PURPOSES The importation of a copy of a work by an individual for his personal purposes shall be permitted without the authorization of the author of, or other owner of copyright in, the work under the following circumstances: (a) When copies of the work are not available in the Philippines and: (1) Not more than one (1) copy at one time is imported for strictly individual use only; or (2) The importation is by authority of and for the use of the Philippine Government; or (3) The importation, consisting of not more than three (3) such copies or likenesses in any one invoice, is not for sale but for the use only of any religious, charitable, or educational society or institution duly incorporated or registered, or is for the encouragement of the fine arts, or for any state school, college, university, or free public library in the Philippines. (b) When such copies form parts of libraries and personal baggage belonging to persons or families arriving from foreign countries and are not intended for sale: Provided, that such copies do not exceed three (3). [Sec. 190.1, RA 8293 is repealed by RA 10372]

It shall not be permissible to produce a volume of a work published in several volumes or to produce missing tomes or pages of magazines or similar works, unless the volume, tome or part is out of stock: Provided, That every library which, by law, is entitled to receive copies of a printed work, shall be entitled, when special reasons so require, to reproduce a copy of a published work which is considered necessary for the collection of the library but which is out of stock. [Sec. 188.2, RA 8293)] REPRODUCTION OF COMPUTER PROGRAM The reproduction in one (1) back-up copy or adaptation of a computer program shall be permitted, without the authorization of the author of, or other owner of copyright in, a computer program, by the lawful owner of that computer program: Provided, That the copy or adaptation is necessary for: (a) The use of the computer program in conjunction with a computer for the purpose,

Copies imported as allowed by this Section may not lawfully be used in any way to violate the rights of owner the copyright or annul or limit the protection secured by this Act, and such unlawful use shall be deemed an infringement and shall be punishable as such without

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prejudice to the proprietor's right of action. [Sec. 190.2, RA 8293 is repealed by RA 10372] Importation and Exportation of Infringing Materials. – Subject to the approval of the Secretary of Finance, the Commissioner of Customs is hereby empowered to make rules and regulations for preventing the importation or exportation of infringing articles prohibited under Part IV of this Act and under relevant treaties and conventions to which the Philippines may be a party and for seizing and condemning and disposing of the same in case they are discovered after they have been imported or before they are exported [Sec. 190, RA 8293 as amended by RA 10372]

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The Chattel Mortgage Law and Real Estate Mortgage Law (Now part of Civil Law)

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and transfer companies and other similar entities, and (d) other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes and other similar monetary instruments or property supervised or regulated by the Securities and Exchange Commission [Sec. 3 (a)]

Anti-Money Laundering Act [R.A. 9160, as amended by R.A. 9194]

Money laundering is a crime whereby the proceeds of an unlawful activity are transacted, thereby making them appear to have originated from legitimate sources. [Sec. 4]

POLICY OF THE LAW

It is the policy of the State to protect and preserve the integrity and confidentiality of bank accounts and to ensure that the Philippines shall not be used as a money laundering site for the proceeds of any unlawful activity. Consistent with its foreign policy, the State shall extend cooperation in transnational investigations and prosecutions of persons involved in money laundering activities whenever committed. [Sec. 2]

COVERED INSTITUTIONS

(1) Banks, non-banks, quasi-banks, trust entities, and all other institutions and their subsidiaries and affiliates supervised or regulated by the Banko Sentral ng Pilipinas (BSP); (2) Insurance companies and all other institutions supervised or regulated by the Insurance Commission; (3) (a) securities dealers, brokers, salesmen, investment houses and other similar entities managing securities or rendering services as investment agent, advisor, or consultant, (b) mutual funds, close-end investment companies, common trust funds, preneed companies and other similar entities, (c) foreign exchange corporations, money changers, money payment, remittance,

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RA 10365 (Amending RA 9160, approved February 15, 2013 and took effect on March 7, 2013) referred to the foregoing as “Covered Persons” and added the following persons: (1) jewelry dealers in precious metals, who, as a business, trade in precious metals, for transactions in excess of One million pesos (P1,000,000.00); (2) jewelry dealers in precious stones, who, as a business, trade in precious stones, for transactions in excess of One million pesos (P1,000,000.00); (3) company service providers which, as a business, provide any of the following services to third parties: (i) acting as a formation agent of juridical persons; (ii) acting as (or arranging for another person to act as) a director or corporate secretary of a company, a partner of a partnership, or a similar position in relation to other juridical persons; (iii) providing a registered office, business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement; and (iv) acting as (or arranging for another person to act as) a nominee shareholder for another person; and (4) persons who provide any of the following services: (a) managing of client money, securities or other assets; (b) management of bank, savings or securities accounts; (c) organization of contributions for the creation, operation or management of companies; and (d) creation, operation or management of juridical persons or arrangements, and buying and selling business entities.

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Notwithstanding the foregoing, the term ‘covered persons’ shall exclude lawyers and accountants acting as independent legal professionals in relation to information concerning their clients or where disclosure of information would compromise client confidences or the attorney-client relationship: Provided, That these lawyers and accountants are authorized to practice in the Philippines and shall continue to be subject to the provisions of their respective codes of conduct and/or professional responsibility or any of its amendments. [Sec. 1, RA 10365]

OBLIGATIONS INSTITUTIONS

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and safely stored for at least five (5) years from the dates when they were closed.

REPORTING OF COVERED SUSPICIOUS TRANSACTIONS

COVERED

(1) Customer Identification (2) Record Keeping (3) Reporting of Covered and Suspicious Transactions [Sec. 9]

CUSTOMER IDENTIFICATION

 Covered institutions shall establish and record the true identity of its clients based on official documents. They shall maintain a system of verifying the true identity of their clients and, in case of corporate clients, require a system of verifying their legal existence and organizational structure, as well as the authority and identification of all persons purporting to act on their behalf.  The provisions of existing laws to the contrary notwithstanding, anonymous accounts, accounts under fictitious names, and all other similar accounts shall be absolutely prohibited. Peso and foreign currency nonchecking numbered accounts shall be allowed. The BSP may conduct annual testing solely limited to the determination of the existence and true identity of the owners of such accounts.

RECORD KEEPING

 All records of all transactions of covered institutions shall be maintained and safely stored for five (5) years from the dates of transactions.  With respect to closed accounts, the records on customer identification, account files and business correspondence, shall be preserved

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AND

 Covered institutions shall report to the AMLC all covered transactions and suspicious transactions within five (5) working days from occurrence thereof, unless the Supervising Authority prescribes a longer period not exceeding ten (10) working days.  Should a transaction be determined to be both a covered transaction and a suspicious transaction, the covered institution shall be required to report the same as a suspicious transaction.  When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees [,representatives, agents, advisors, consultants or associates not included; repealed by RA 9194] shall not be deemed to have violated Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791 and other similar laws, but are prohibited from communicating, directly or indirectly, in any manner or by any means, to any person, the fact that a covered or suspicious transaction report was made, the contents thereof, or any other information in relation thereto. In case of violation thereof, the concerned officer and employee of the covered institution shall be criminally liable. However, no administrative, criminal or civil proceedings, shall lie against any person for having made a covered or suspicious transaction report in the regular performance of his duties in good faith, whether or not such reporting results in any criminal prosecution under this Act or any other law.  When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees are prohibited from communicating directly or indirectly, in any manner or by any means, to any person or entity, the media, the fact that a covered or suspicious transaction report was made, the contents thereof, or any other information in relation thereto. Neither may such reporting be published or aired in any manner or form by the mass media, electronic

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mail, or other similar devices. In case of violation thereof, the concerned officer and employee of the covered institution and media shall be held criminally liable.

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SUSPICIOUS TRANSACTIONS Transactions with covered institutions, regardless of the amounts involved, where any of the following circumstances exist: (1) There is no underlying legal or trade obligation, purpose or economic justification; (2) The client is not properly identified; (3) The amount involved is not commensurate with the business or financial capacity of the client; (4) Taking into account all known circumstances, it may be perceived that the client’s transaction is structured in order to avoid being the subject of reporting requirements under the Act; (5) Any circumstance relating to the transaction which is observed to deviate from the profile of the client and/or the client’s past transactions with the covered institution; (6) The transaction is in anyway related to an unlawful activity or offense under this Act that is about to be, is being or has been committed; or (7) Any transaction that is similar or analogous to any of the foregoing [Sec. 3 [b-1], added by Sec. 2 of RA 9194]

Sec. 7 of RA 10365 amended the foregoing to read as follows: “Covered persons shall report to the AMLC all covered transactions and suspicious transactions within five (5) working days from occurrence thereof, unless the AMLC prescribes a different period not exceeding fifteen (15) working days. “Lawyers and accountants acting as independent legal professionals are not required to report covered and suspicious transactions if the relevant information was obtained in circumstances where they are subject to professional secrecy or legal professional privilege. “x x x “x x x

“When reporting covered or suspicious transactions to the AMLC, covered persons and their officers and employees are prohibited from communicating, directly or indirectly, in any manner or by any means, to any person or entity, the media, the fact that a covered or suspicious transaction has been reported or is about to be reported, the contents of the report, or any other information in relation thereto. Neither may such reporting be published or aired in any manner or form by the mass media”, electronic mail, or other similar devices. In case of violation thereof, the concerned officer and employee of the covered person and media shall be held criminally liable.”

WHEN IS MONEY LAUNDERING COMMITTED

Money laundering is a crime whereby the proceeds of an unlawful activity are transacted, thereby making them appear to have originated from legitimate sources. It is committed by the following: (1) Any person knowing that any monetary instrument or property represents, involves, or relates to the proceeds of any unlawful activity, transacts or attempts to transact said monetary instrument or property. (2) Any person knowing that any monetary instrument or property involves the proceeds of any unlawful activity, performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in paragraph (a) above. (3) Any person knowing that any monetary instrument or property is required under this Act to be disclosed and filed with the Anti-Money Laundering Council (AMLC), fails to do so. [Sec. 4]

COVERED TRANSACTIONS A transaction in cash or other equivalent monetary instrument involving a total amount in excess of five hundred thousand pesos (P500,000.00) within one banking day. [Sec. 3 [b], as amended by Sec. 1 of RA 9194]

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(4) Plunder under Republic Act No. 7080, as amended; (5) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised Penal Code, as amended; (6) Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602; (7) Piracy on the high seas under the Revised Penal Code, as amended and Presidential Decree No. 532; (8) Qualified theft under Article 310 of the Revised Penal Code, as amended; (9) Swindling under Article 315 of the Revised Penal Code, as amended; (10) Smuggling under Republic Act Nos. 455 and 1937; (11) Violations under Republic Act No. 8792, otherwise known as the Electronic Commerce Act of 2000; (12) Hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended, including those perpetrated by terrorists against noncombatant persons and similar targets; (13) Fraudulent practices and other violations under Republic Act No. 8799, otherwise known as the Securities Regulation Code of 2000; (14) Felonies or offenses of a similar nature that are punishable under the penal laws of other countries. [Sec. 3 (i)]

Sec. 4 of RA 10365 amends this section as follows: Money laundering is committed by any person who, knowing that any monetary instrument or property represents, involves, or relates to the proceeds of any unlawful activity: (a) transacts said monetary instrument or property; (b) converts, transfers, disposes of, moves, acquires, possesses or uses said monetary instrument or property; (c) conceals or disguises the true nature, source, location, disposition, movement or ownership of or rights with respect to said monetary instrument or property; (d) attempts or conspires to commit money laundering offenses referred to in paragraphs (a), (b) or (c); (e) aids, abets, assists in or counsels the commission of the money laundering offenses referred to in paragraphs (a), (b) or (c) above; and (f) performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in paragraphs (a), (b) or (c) above. Money laundering is also committed by any covered person who, knowing that a covered or suspicious transaction is required under this Act to be reported to the Anti-Money Laundering Council (AMLC), fails to do so.

UNLAWFUL ACTIVITIES PREDICATE CRIMES

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RA 10365 added the following: (1) Terrorism and conspiracy to commit terrorism as defined and penalized under Sections 3 and 4 of Republic Act No. 9372 (2) Financing of terrorism under Section 4 and offenses punishable under Sections 5, 6, 7 and 8 of Republic Act No. 10168, otherwise known as the Terrorism Financing Prevention and Suppression Act of 2012: (3) Bribery under Articles 210, 211 and 211-A of the Revised Penal Code, as amended, and Corruption of Public Officers under Article 212 of the Revised Penal Code, as amended; (4) Frauds and Illegal Exactions and Transactions under Articles 213, 214, 215 and 216 of the Revised Penal Code, as amended;

OR

Unlawful activity refers to any act or omission or series or combination thereof involving or having direct relation to the following: (1) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended; (2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of Republic Act No. 9165, otherwise known as the Comprehensive Dangerous Drugs Act of 2002; (3) Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as amended; otherwise known as the Anti-Graft and Corrupt Practices Act;

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(5) Malversation of Public Funds and Property under Articles 217 and 222 of the Revised Penal Code, as amended; (6) Forgeries and Counterfeiting under Articles 163, 166, 167, 168, 169 and 176 of the Revised Penal Code, as amended; (7) Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise known as the AntiTrafficking in Persons Act of 2003; (8) Violations of Sections 78 to 79 of Chapter IV, of Presidential Decree No. 705, otherwise known as the Revised Forestry Code of the Philippines, as amended; (9) Violations of Sections 86 to 106 of Chapter VI, of Republic Act No. 8550, otherwise known as the Philippine Fisheries Code of 1998; (10) Violations of Sections 101 to 107, and 110 of Republic Act No. 7942, otherwise known as the Philippine Mining Act of 1995; (11) Violations of Section 27(c), (e), (f), (g) and (i), of Republic Act No. 9147, otherwise known as the Wildlife Resources Conservation and Protection Act; (12) Violation of Section 7(b) of Republic Act No. 9072, otherwise known as the National Caves and Cave Resources Management Protection Act; (13) Violation of Republic Act No. 6539, otherwise known as the Anti-Carnapping Act of 2002, as amended; (14) Violations of Sections 1, 3 and 5 of Presidential Decree No. 1866, as amended, otherwise known as the decree Codifying the Laws on Illegal/Unlawful Possession, Manufacture, Dealing In, Acquisition or Disposition of Firearms, Ammunition or Explosives; (15) Violation of Presidential Decree No. 1612, otherwise known as the Anti-Fencing Law; (16) Violation of Section 6 of Republic Act No. 8042, otherwise known as the Migrant Workers and Overseas Filipinos Act of 1995, as amended by Republic Act No. 10022; (17) Violation of Republic Act No. 8293, otherwise known as the Intellectual Property Code of the Philippines; (18) Violation of Section 4 of Republic Act No. 9995, otherwise known as the Anti-Photo and Video Voyeurism Act of 2009;

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(19) Violation of Section 4 of Republic Act No. 9775, otherwise known as the Anti-Child Pornography Act of 2009; (20) Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of Republic Act No. 7610, otherwise known as the Special Protection of Children Against Abuse, Exploitation and Discrimination;

ANTI-MONEY LAUNDERING COUNCIL The Anti-Money Laundering Council shall be composed of the Governor of the Bangko Sentral ng Pilipinas as chairman, the Commissioner of the Insurance Commission and the Chairman of the Securities and Exchange Commission as members. [Sec. 7]

FUNCTIONS

The AMLC shall act unanimously in the discharge of its functions as defined hereunder: (1) to require and receive covered or suspicious transaction reports from covered institutions; (2) to issue orders addressed to the appropriate Supervising Authority or the covered institution to determine the true identity of the owner of any monetary instrument or property subject of a covered transaction or suspicious transaction report or request for assistance from a foreign State, or believed by the Council, on the basis of substantial evidence, to be, in whole or in part, wherever located, representing, involving, or related to, directly or indirectly, in any manner or by any means, the proceeds of an unlawful activity. (3) to institute civil forfeiture proceedings and all other remedial proceedings through the Office of the Solicitor General; (4) to cause the filing of complaints with the Department of Justice or the Ombudsman for the prosecution of money laundering offenses; (5) to investigate suspicious transactions and covered transactions deemed suspicious after an investigation by AMLC, money laundering activities, and other violations of this Act; (6) to apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument or property alleged to be the

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proceeds of any unlawful activity as defined in Section 3(i) hereof; (7) to implement such measures as may be necessary and justified under this Act to counteract money laundering; (8) to receive and take action in respect of, any request from foreign states for assistance in their own anti-money laundering operations provided in this Act; (9) to develop educational programs on the pernicious effects of money laundering, the methods and techniques used in money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders; (10) to enlist the assistance of any branch, department, bureau, office, agency or instrumentality of the government, including government-owned and -controlled corporations, in undertaking any and all antimoney laundering operations, which may include the use of its personnel, facilities and resources for the more resolute prevention, detection and investigation of money laundering offenses and prosecution of offenders; and (11) to impose administrative sanctions for the violation of laws, rules, regulations and orders and resolutions issued pursuant thereto. [Sec. 7]

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FREEZING OF MONETARY INSTRUMENT OR PROPERTY

The Court of Appeals, upon application ex parte by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity as defined in Section 3(i) hereof, may issue a freeze order which shall be effective immediately. The freeze order shall be for a period not exceeding six (6) months depending upon the circumstances of the case. No court can issue a temporary restraining order or a writ of injunction against any freeze order, except the Supreme Court. [Sec. 10] Sec. 8 of RA 10365 revised the freezing mechanism to be as follows: “Upon a verified ex parte petition by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity as defined in Section 3(i) hereof, the Court of Appeals may issue a freeze order which shall be effective immediately, and which shall not exceed six (6) months depending upon the circumstances of the case: Provided, That if there is no case filed against a person whose account has been frozen within the period determined by the court, the freeze order shall be deemed ipso facto lifted: Provided, further, That this new rule shall not apply to pending cases in the courts. In any case, the court should act on the petition to freeze within twenty-four (24) hours from filing of the petition. If the application is filed a day before a nonworking day, the computation of the twenty-four (24)hour period shall exclude the nonworking days.

Sec. 6 of RA 10365 added the following power to the AMLC: (1) to require the Land Registration Authority and all its Registries of Deeds to submit to the AMLC, reports on all real estate transactions involving an amount in excess of Five hundred thousand pesos (P500,000.00) within fifteen (15) days from the date of registration of the transaction, in a form to be prescribed by the AMLC. The AMLC may also require the Land Registration Authority and all its Registries of Deeds to submit copies of relevant documents of all real estate transactions.

A person whose account has been frozen may file a motion to lift the freeze order and the court must resolve this motion before the expiration of the freeze order. No court shall issue a temporary restraining order or a writ of injunction against any freeze order, except the Supreme Court.”

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AUTHORITY TO INQUIRE INTO BANK DEPOSITS

Notwithstanding the provisions of Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791, and other laws, the AMLC may inquire into or examine any particular deposit or investment with any banking institution or non-bank financial institution upon order of any competent court in cases of violation of this Act when it has been established that— (1) there is probable cause that the deposits OR (2) investments involved are related to an unlawful activity as defined in Section 3(i) hereof or a money laundering offense under Section 4 hereof;

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3(i)(1), (2), and (12) hereof, and felonies or offenses of a nature similar to those mentioned in Section 3(i)(1), (2), and (12), which are Punishable under the penal laws of other countries, and terrorism and conspiracy to commit terrorism as defined and penalized under Republic Act No. 9372." "The Court of Appeals shall act on the application to inquire into or examine any deposit or investment with any banking institution or non-bank financial institution within twenty-four (24) hours from filing of the application." "To ensure compliance with this Act, the Bangko Sentral ng Pilipinas may, in the course of a periodic or special examination, check the compliance of a Covered institution with the requirements of the AMLA and its implementing rules and regulations."

except that no court order shall be required in cases involving unlawful activities defined in Sections 3(i)(1), (2) and (12).

"For purposes of this section, ‘related accounts’ shall refer to accounts, the funds and sources of which originated from and/or are materially linked to the monetary instrument(s) or property(ies) subject of the freeze order(s)."

To ensure compliance with this Act, the Bangko Sentral ng Pilipinas (BSP) may inquire into or examine any deposit or investment with any banking institution or non-bank financial institution when the examination is made in the course of a periodic or special examination, in accordance with the rules of examination of the BSP. [Sec.11] Sec. 2 of RA 10167 amended Sec. 11 to read as follows: “Notwithstanding the provisions of Republic Act No. 1405, as amended; Republic Act No. 6426, as amended; Republic Act No. 8791; and other laws, the AMLC may inquire into or examine any particular deposit or investment, including related accounts, with any banking institution or non-bank financial institution upon order of any competent court based on an ex parte application in cases of violations of this Act, when it has been established that there is probable cause that the deposits or investments, including related accounts involved, are related to an unlawful activity as defined in Section 3(i) hereof or a money laundering offense under Section 4 hereof; except that no court order shall be required in cases involving activities defined in Section

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"A court order ex parte must first be obtained before the AMLC can inquire into these related Accounts: Provided, That the procedure for the ex parte application of the ex parte court order for the principal account shall be the same with that of the related accounts." "The authority to inquire into or examine the main account and the related accounts shall comply with the requirements of Article III, Sections 2 and 3 of the 1987 Constitution, which are hereby incorporated by reference." Amendments under RA 9194 (1) Lowers the threshold amount for single covered transactions (cash or other equivalent monetary instrument) from P4M to P500,000.00 within one (1) banking day. (2) Expands the reporting requirements to include the reporting of suspicious transactions regardless of the amount involved (3) Authorizes AMLC to inquire into or examine any particular deposit or investment, with

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any banking institution or non-bank financial institution and their subsidiaries and affiliates upon order of any competent court in cases of violation of this Act, when it has been established that there is probable cause that the deposits or investments are related to an unlawful activity. However, no court order is required in cases involving unlawful activities of kidnapping for ransom, narcotics offenses and hijacking, destructive arson and murder, including those perpetrated by terrorists against noncombatant persons and similar targets. (4) Authorizes the Bangko Sentral ng Pilipinas to inquire into or examine any deposit or investment with any banking institution or non-bank financial institution and their subsidiaries and affiliates when the examination is made in the course of a periodic or special examination, in accordance with the rules of examination of the BSP to ensure compliance with R.A. No. 9160, as amended. (5) Transfers the authority to freeze any money/property from the AMLC to the Court of Appeals.

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welcome as a supplement to Filipino capital and technology in those enterprises serving mainly the domestic market.  As a general rule, there are no restrictions on extent of foreign ownership of export enterprises. In domestic market enterprises, foreigners can invest as much as one hundred percent (100%) equity except in areas included in the negative list. Foreign owned firms catering mainly to the domestic market shall be encouraged to undertake measures that will gradually increase Filipino participation in their businesses by taking in Filipino partners, electing Filipinos to the board of directors, implementing transfer of technology to Filipinos, generating more employment for the economy and enhancing skills of Filipino workers. [Sec. 2]

DEFINITION OF TERMS Foreign Investment - An equity investment made by a nonPhilippine national in the form of foreign exchange and/or other assets actually transferred to the Philippines and duly registered with the Central Bank which shall assess and appraise the value of such assets other than foreign exchange. [Sec. 3(c)]

Foreign Investments Act [R.A. 7042]

“Doing Business” in the Philippines - Includes: (a) soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches; (b) appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; (c) participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization

POLICY OF THE LAW

 It is the policy of the State to attract, promote and welcome productive investments from foreign individuals, partnerships, corporations, and governments, including their political subdivisions, in activities which significantly contribute to national industrialization and socio-economic development to the extent that foreign investment is allowed in such activity by the Constitution and relevant laws. Foreign investments shall be encouraged in enterprises that significantly expand livelihood and employment opportunities for Filipinos; enhance economic value of farm products; promote the welfare of Filipino consumers; expand the scope, quality and volume of exports and their access to foreign markets; and/or transfer relevant technologies in agriculture, industry and support services. Foreign investments shall be

Provided, however, That the phrase “doing business” shall not be deemed to include mere

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investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account [Sec. 3 [d]]

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and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of each of both corporations must be citizens of the Philippines, in order that the corporation shall be considered a Philippine national [Sec. 3(a)]

Export Enterprise - An enterprise wherein a manufacturer, processor or service (including tourism) enterprise exports sixty percent (60%) or more of its output, or wherein a trader purchases products domestically and exports sixty percent (60%) or more of such purchases [Sec. 3 (e)]

Registration of Investments on Non-Philippine Nationals Without need of prior approval, a non-Philippine national may, upon registration with the Securities and Exchange Commission (SEC), or with the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the Department of Trade and Industry in the case of single proprietorships, do business as defined in Section 3 (d) of this Act or invest in a domestic enterprise up to one hundred percent (100%) of its capital, unless participation of nonPhilippine nationals in the enterprise is prohibited or limited to a smaller percentage by existing law and/or under the provisions of this Act. The SEC or BTRCP, as the case may be, shall not impose any limitations on the extent of foreign ownership in an enterprise additional to those provided in this Act: Provided, however, That any enterprise seeking to avail of incentives under the Omnibus Investment Code of 1987 must apply for registration with the Board of Investments (BOI), which shall process such application for registration in accordance with the criteria for evaluation prescribed in said Code: Provided, finally, That a non-Philippine national intending to engage in the same line of business as an existing joint venture, in which he or his majority shareholder is a substantial partner, must disclose the fact and the names and addresses of the partners in the existing joint venture in his application for registration with SEC. During the transitory period as provided in Section 15 hereof, SEC shall disallow registration of the applying non-Philippine national if the existing joint venture enterprise, particularly the Filipino partners therein, can reasonably prove they are capable to make the investment needed for the domestic market activities to be undertaken by the competing applicant. Upon effectivity of this Act, SEC shall

Domestic Market Enterprise - An enterprise which produces goods for sale, or renders services to the domestic market entirely or if exporting a portion of its output fails to consistently export at least sixty percent (60%) thereof [Sec. 3 (f)]

REGISTRATION OF INVESTMENTS ON NONPHILIPPINE NATIONALS Philippine National (a) Citizen of the Philippines (b) Domestic partnership or association wholly owned by citizens of the Philippines (c) Corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines (d) Corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos (e) trustee of funds for pension or other employee retirement, where the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of Philippine nationals Provided, That where a corporation and its nonFilipino stockholders own stocks in a Securities

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effect registration of any enterprise applying under this Act within fifteen (15) days upon submission of completed requirements. [Sec. 5]

FOREIGN INVESTMENTS EXPORT ENTERPRISE

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(a) which are defense-related activities, requiring prior clearance and authorization from Department of National Defense (DND) to engage in such activity, such as the manufacture, repair, storage and/or distribution of firearms, ammunition, lethal weapons, military ordinance, explosives, pyrotechnics and similar materials; unless such manufacturing or repair activity is specifically authorized, with a substantial export component, to a non-Philippine national by the Secretary of National Defense; or (b) which have implications on public health and morals, such as the manufacture and distribution of dangerous drugs; all forms of gambling; nightclubs, bars, beerhouses, dance halls; sauna and steam bathhouses and massage clinics.

IN

 Foreign investment in export enterprises whose products and services do not fall within Lists A and B of the Foreign Investment Negative List provided under Section 8 hereof is allowed up to one hundred percent (100%) ownership.  Export enterprises which are non-Philippine nationals shall register with BOI and submit the reports that may be required to ensure continuing compliance of the export enterprise with its export requirement. BOI shall advise SEC or BTRCP, as the case may be, of any export enterprise that fails to meet the export ratio requirement. The SEC or BTRCP shall thereupon order the noncomplying export enterprise to reduce its sales to the domestic market to not more than forty percent (40%) of its total production; failure to comply with such SEC or BTRCP order, without justifiable reason, shall subject the enterprise to cancellation of SEC or BTRCP registration, and/or the penalties provided in Section 14 hereof. [Sec. 6]

“Small and medium-sized domestic market enterprises, with paid-in equity capital less than the equivalent two hundred thousand US dollars (US$200,000) are reserved to Philippine nationals, Provided that if: (1) they involve advanced technology as determined by the Department of Science and Technology or (2) they employ at least fifty (50) direct employees, then a minimum paid-in capital of one hundred thousand US dollars (US$100,000.00) shall be allowed to non-Philippine nationals.

FOREIGN INVESTMENT IN DOMESTIC MARKET ENTERPRISE

Amendments to List B may be made upon recommendation of the Secretary of National Defense, or the Secretary of Health, or the Secretary of Education, Culture and Sports, endorsed by the NEDA, approved by the President, and promulgated by a Presidential Proclamation.

Non-Philippine nationals may own up to one hundred percent (100%) of domestic market enterprises unless foreign ownership therein is prohibited or limited by the Constitution existing law or the Foreign Investment Negative List under Section 8 hereof. [Sec. 7]

“Transitory Foreign Investment Negative List” established in Sec. 15 hereof shall be replaced at the end of the transitory period by the first Regular Negative List to be formulated and recommended by NEDA, following the process and criteria provided in Sections 8 of this Act.

FOREIGN INVESTMENT NEGATIVE LIST The Foreign Investment Negative List shall have two (2) components lists; A, and B. (1) List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the Constitution and specific laws. (2) List B shall contain the areas of activities and enterprises regulated pursuant to law:

The first Regular Negative List shall be published not later than sixty (60) days before the end of the transitory period provided in said section, and shall become immediately effective

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at the end of the transitory period. Subsequent Foreign Investment Negative Lists shall become effective fifteen (15) days after publication in a newspaper of general circulation in the Philippines: Provided, however, That each Foreign Investment Negative List shall be prospective in operation and shall in no way affect foreign investment existing on the date of its publication. “Amendments to List B after promulgation and publication of the first Regular Foreign Investment Negative List at the end of the transitory period shall not be made more often than once every two (2) years”. [Sec. 8]

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