Commercial Law - Atty. Rondez(1)

Green Notes

2014

Commercial Law Prepared by: Atty. Renato Rondez

MERCANTILE LAW

principal or master be a natural person or a corporation. Hence, when a tortuous act is committed by an officer or agent of a corporation under express direction or authority of the corporation, it would be liable.

PRIVATE CORPORATIONS How are corporations classified? Corporations are generally classified as stock or non-stock. A stock corporation is one which has capital stock divided into shares and is authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. A non stock corporation is one where no part of its income is distributable as dividends to its members, trustees or officers, and when any profit is obtained as an incident if its operations shall, whenever necessary or proper be used for the furtherance of the purpose/s for which the corporation was organized. What is the doctrine of separate legal personality?  This doctrine holds that a corporation has a personality separate and distinct from its individual stockholders or members.  This affects liability for acts or contracts, right to bring actions, acquisition of property, and changes in the identity of stockholders or members.  Insofar as moral damages, the general rule is that it is not entitled to it. Recognized exceptions are when the claim for it is based on Article 2219 (7) of the Civil Code in an action for libel or defamation or it claims that its reputation has been besmirched. Corporate tort liability • Tort liability can be imposed on a corporation because generally speaking, the rules governing liability of a principal or master for a tort committed by an agent or servant are the same whether the

What is the effect of piercing the veil of corporate fiction?  The effect is to make stockholders or members liable for a corporate obligation.  The “fraud test” applies when corporate fiction is used to justify a wrong, protect fraud or defend a crime.  The other tests to determine applicability are: (a) control test (b) alter-ego or instrumentality test, or (c) equity test How is the nationality of a corporation determined?  As a general rule, nationality is determined by place of incorporation.  The “control test” as a means of determining nationality looks at the nationality of the stockholders or members of the corporation.  The “grandfather test” as a means of determining nationality looks at the percentage of foreign holdings in a corporation which is a stockholder in a Filipino corporation to determine whether or not the percentage requirement of Filipino ownership has been met. What is the doctrine of relation?  This refers to the retroactivity of the filing of the amendment to extend the corporate term to the date of the passage of the appropriate resolutions to extend the term in instances when the failure to file the amended articles is due to the neglect of the officer with whom it is required to be filed or a wrongful refusal to receive it.  This is also known as the “relating back doctrine.”

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Green Notes

2014

Commercial Law Prepared by: Atty. Renato Rondez

How are shares classified? 1. Shares may be classified as common, holders of which are entitled to a pro-rata division of profits, or preferred, holders of which are entitled to some priority on distribution of profits and assets over common shareholders. 2. They can also be classified as with par value, referring to a fixed minimum issue price stated in the articles and the certificate, or with no par value, referring to the absence of any stated value in the articles and the certificate. 3. Banks, trust companies, insurance companies, public utilities and building and loan associations cannot issue no par value shares. What is a redeemable share? • These are shares of stocks issued by a corporation which said corporation can purchase or take up from their holders upon expiry of the period stated in certificates of stock representing said shares. • After a redemption, it is required that the corporation should have sufficient assets in its books to cover debts and liabilities, inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. What is a treasury share?  A treasury share is a share that has been issued and paid for but subsequently reacquired by purchase, redemption, donation or any other lawful means.  It may again be disposed of for a reasonable price as determined by the board.  Note that its acquisition must be always be funded by surplus profits, otherwise it violates the Trust Fund Doctrine as capital is impaired.

What are the rules on non-voting shares?  Preferred shares may be deprived of voting rights, together with redeemable shares but if so, there must be a class/series which shall have full voting rights.  Nevertheless, even if voting rights are not enjoyed, holders of such shares shall still vote in the following instances: (1) amendment of articles (2) adoption or amendment of by laws (3) sale, lease, exchange, pledge or other disposition of all or substantially all of corporate property (4) increase/decrease of corporate bonded indebtedness (5) increase/decrease of capital stock (6) merger/consolidation (7) investment in another corporation or business, and (8) dissolution What is the effect of Gamboa v. Teves? • The ruling in Gamboa v. Teves (652 SCRA 690, June 28, 2011) prescribes that in determining the meaning of the term “capital” as prescribed in Section 11, Article XII, National Economy and Patrimony of the Constitution it is deemed to refer to shares of stock that can vote in the election of directors of the corporation. What is a subscription contract?  It is a contract for the acquisition of unissued shares in an existing corporation or one that is to be formed regardless of the way the contract is denominated.  They can be either be a preincorporation or post incorporation subscription contract.  A pre-incorporation subscription contract is irrevocable for a period of 6 months from date of subscription unless all other subscribers consent or the corporation fails to materialize within the period. However, it becomes absolutely irrevocable if

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Green Notes

2014

Commercial Law Prepared by: Atty. Renato Rondez

the articles have been filed with the SEC.

Who is a promoter?  A promoter is one who brings about the formation and organization of a corporation.  He has joint personal liability for a corporation that was never formed.  When the corporation has been formed, upon ratification by the board of his contracts, he becomes an agent of the corporation. Liability then is borne by the corporation in its capacity as principal. What are the non-amendable parts of the Articles of Incorporation?  The following items cannot be amended: (a) Names of incorporators; (b) Names of original subscribers to the capital stock of the corporation and their subscribed and paid up capital; (c) Names of the original directors; (d) Treasurer elected by the original subscribers; (e) Members who contributed to the initial capital of the non-stock corporation; and (e) Witnesses to and acknowledgement of the articles. When does a corporation commence to have existence?  A corporation commences to have existence from the issuance by the SEC of a certificate of incorporation under its official seal. The effect of which is to constitute its stockholders or members and their successors as a Body Politic and Corporate under the name and for the term stated in the Articles.  It is said to have been given de jure existence or can be said to be incorporated.  The exception is a Corporation Sole, which is deemed incorporated upon filing of its Articles.

What must a corporation do after incorporation?  A corporation has to formally organize and commence transaction of business within 2 years from date of incorporation.  If it fails to do so, its corporate powers cease and it is deemed dissolved.  If it commences, but becomes continuously inoperative for 5 years, the same is ground for suspension or revocation of the certificate. What are By-Laws? What are its elements?  By-laws are: the rules of action adopted by a corporation for its internal government and for the government of its stockholders or members and those having the direction, management and control of its affairs in relation to the corporation and among themselves.  The elements of valid by-laws are: (a) they must not be contrary to the code, it is void if contrary to the code (b) not be contrary to moral or public policy (c) must not impair obligations of contract – as a general rule (d) they must be general and uniform in application (e) they must be consistent with the Charter / Articles (f) they must be reasonable or capable of compliance. General Capacity v. Specific Capacity • The general capacity theory maintains that a corporation is said to hold such powers as are not prohibited or withheld from it by general law. • The specific capacity theory maintains that the corporation cannot exercise powers except those expressly/impliedly given. What is the doctrine of individuality of subscription? What is the doctrine of equality of shares?

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Green Notes

2014

Commercial Law Prepared by: Atty. Renato Rondez

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The doctrine of individuality of subscription holds that a subscription is one entire and indivisible whole contract. It cannot be divided into portions. The doctrine of equality of shares holds 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.

What are pre-emptive rights?  Pre-emptive rights referring to the right to subscribe to all issues or disposition of shares in proportion to a stockholder’s shareholdings may be denied.  As a general rule, pre-emptive rights exist but may be restricted or denied by the Articles or an amendment thereto. It will not exist when (a) the shares are issued in compliance with laws requiring stock offerings or minimum stock ownership (b) the shares are issued in good faith with approval of stockholders representing 2/3 of the outstanding capital stock in exchange for property needed for corporate purposes or in payment of a previously contracted debt.  If restricted by an amendment, a stockholder may exercise his appraisal right.

How can corporate assets be disposed of?  A corporation can freely dispose of its assets.  However, any sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of corporate assets will be required to be undertaken upon a majority vote of the Board and 2/3 vote of stockholders or members, written

notice having been given when the contemplated disposition will rendered it incapable of continuing the business or accomplishing its purpose.

When can the corporation acquire its own shares?  The power to acquire its own shares can only be undertaken if it is for legitimate corporate purpose/s provided that it has unrestricted retained earnings.  The legitimate corporate purposes for acquisition are (a) elimination of fractional shares or those less than 1 share (b) to collect or compromise an indebtedness to the corporation arising out of an unpaid subscription in a delinquency sale and to purchase delinquent shares at the auction (c) to pay dissenting or withdrawing stockholders entitled to the payment of their shares. What kind of dividends can be declared and when are they given?  Generally dividends may be given in cash or in stock.  The right of a stockholder to the dividend is immediate if it is a cash dividend. The corporation becomes a debtor of the stockholder. If it is a stock dividend, it is subject to a stockholder vote and an increase of capital stock, if it comes from a new issuance.  However, that any cash dividend due on delinquent stock shall first be applied to the unpaid balance, costs, and expenses or if it be a stock dividend, it is withheld until the unpaid subscription is paid. When and how can dividends be declared?  The Board may declare dividends out of unrestricted retained earnings or total assets less liabilities and legal capital, they must be accumulated from normal and continuous operations not

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Green Notes

2014

Commercial Law Prepared by: Atty. Renato Rondez

allocated for any managerial, contractual or legal purpose and which are free for distribution to stockholders as dividends payable in cash, in property or in stock to all stockholders on the basis of outstanding stock held by them.

Can a declaration of dividends be compelled?  Dividend declaration is generally discretionary but becomes mandatory when its surplus profits are in excess of 100% of paid in capital stock. However, the mandatory character shall not obtain: (a) when justified by definite corporate expansion projects or programs approved by the Board (b) when it is prohibited by a loan agreement with any financial institution or creditor from declaring dividends without its consent and the consent is not yet obtained (c) when it can be shown that such retention is necessary under special circumstances obtaining in the corporation, as there is a need for a special reserve for probable contingencies. What are management contracts? How can they be entered into?  It is any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation is a management contract even if called a service or operating contract.  It can be undertaken with the approval by a majority vote of the Board and majority vote of the stockholders or members of both the managed and the managing corporation. Provided that, if the stockholder/s representing the same interest of both the managing and managed corporations own or control more than 1/3 of the outstanding capital stock entitled to vote of the managing corporation or a

majority of the Board of the managing corporation likewise constitute a majority of the board of the managed corporation, the contract must be approved by 2/3 vote of the outstanding capital stock or of the members of the managed corporation.

What are ultra vires acts?  Ultra Vires acts are acts that are in violation of the Code as it provides that: no corporation shall possess or exercise corporate powers except those conferred by the code, its Articles and except as such are necessary or incidental to the exercise of the powers so conferred.  A ratification is possible provided the act is not illegal.  If ultra vires in part only and if separable, it is valid as to the part not ultra vires, invalid as to the other part. What is the trust fund doctrine?  The subscribed capital stock of the corporation is a trust fund for the payment of the debts of the corporation which the creditors have the right to look up to satisfy their credits, and which the corporation may not dissipate.  The exceptions are: (a) Reduction of the authorized capital stock; (b) Purchase of redeemable shares; (c) Dissolution and eventual liquidation. What are the management rights of a stockholder? • (a) To attend and vote in person or by proxy at a stockholder’s meetings; (b) To elect and remove directors; (c) To approve certain corporate acts; (d) To compel the calling of the meetings; (e) To have the corporation voluntarily dissolved; (f) To enter into a voting trust agreement; and (g) To adopt/amend/appeal the by-laws or adopt new by-laws.

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Green Notes

2014

Commercial Law Prepared by: Atty. Renato Rondez

What are the proprietary rights of a stockholder? • (a) To transfer stock in the corporate book; (b) To receive dividends when declared; (c) To the issuance of certificate of stock or other evidence of stock ownership; (d) To participate in the distribution of corporate assets upon dissolution; and (e) To preemption in the issue of shares.

What are the remedial rights of a stockholder? • (a) To inspect corporate books; (b) To recover stock unlawfully sold for delinquency; (c) To demand payment in the exercise of appraisal right; (d) To be furnished recent financial statements or reports of the corporation’s operation; and (e) To bring suits (derivative suit, individual suit, and representative suit). What is a derivative suit? An individual suit? A representative suit?  A derivative suit is one brought by one or more stockholders or members in the name and on behalf of the corporation to redress wrongs committed against it or to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue or are the ones to be sued or hold control of the corporation.  An individual suit is one brought by a stockholder against the corporation for direct violation of his contractual rights.  A representative suit is one brought by a person in his own behalf and on behalf of all similarly situated. What are the requisites of a derivative suit? • In the case of Hi-Yield Realty, Inc. v. Court of Appeals, 590 SCRA 548 and reiterated in Lisam Enterprises Inc. v. Banco De Oro

Unibank, Inc., 670 SCRA 310, it was held that the requisites of a derivative suit are: (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, and (c) the cause of action actually devolves on the corporation, the wrongdoing or harm having been caused the corporation, and not the particular stockholder bringing the suit.

What are the primary obligations of a stockholder? • Stockholders have the following obligations: (a) Obligation to pay the corporation the consideration for his subscription, including interest when required; (b) Obligation to pay the creditors of the corporation to the extent of their subscription, or beyond, in case the doctrine of piercing the veil of corporate fiction is applicable. What is a proxy? • Proxy is a written authorization, empowering another person (proxy) to represent a shareholder and vote in his stead in the stockholder’s meeting. • What is a voting trust agreement? • It is an agreement whereby one or more stockholders transfer their shares of stocks to a trustee, who thereby acquires for a period of time the voting rights (and/or any other specific rights) over such shares; and in return, trust certificates are given to the stockholder/s, which are transferable like stock certificates, subject, to the trust agreement. What powers are reserved only for stockholders or members?  The powers that are expressly reserved by law to stockholders or members are:(a) removal of

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Green Notes

2014

Commercial Law Prepared by: Atty. Renato Rondez

directors or trustees (b) granting of compensation, other than per diems, to directors (c) ratification of acts of self dealing director or trustee, interlocking director/s, disloyal director/s (d) delegation of power to amend by-laws (e) calling of a meeting, upon good cause, when no person is authorized to call it (f) when management of a close corporation is vested in the stockholders.

What are the percentage voting requirements when stockholders or members act?  The required vote is usually 2/3 of the outstanding capital stock.  In the following, it is a majority: (a) election of members of the Board (b) removal of directors or trustees (c) approval of management contracts (d) adoption of by laws/ its amendment or repeal and to revoke power of amendment delegated to the Board (e) fix issue price of no par value shares (f) fixing compensation of directors. Why is the board the repository of corporate powers?  The law provides that all corporate powers of all corporations formed under it shall be exercised, all business conducted and all property held by a Board of Directors or Trustees.  It is the board which determines corporate policy and prescribes the manner of general management of its business activities.  This is so for the purpose of efficiency in exchange for profits. How does one become a member of the board?  One must possess the following qualifications: (1)He must own at least 1 share or at least it should be listed in his name as owner, if it is a non stock corporation, he

must be a member; (2) Every director/trustee must continuously own at least a share during his term or be a member; (3) A majority must be residents of the Philippines; (4) He must not have been convicted by final judgment of an offense punishable by a period in excess of 6 years or a violation of the code, committed within a period of 5 years prior to the date of election; (5) Be a Filipino citizen in the instances required by law; (6) Such other qualifications as may be prescribed in the By-laws.

What is meant by independent director?  An Independent Director is a person who, apart from his fees and shareholdings, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director. How is the power of removal exercised?  The removal of directors or trustees require that (a) it must take place at a regular meeting of the corporation or a special meeting called for that purpose (b) there must be previous notice to stockholders or members of the intention to propose such removal. The notice must be specific and in writing, by publication or sending of a copy the notice (c) the removal is effected by 2/3 vote of capital stock /members entitled to vote except that a director elected by cumulative voting cannot be removed as its effect is to deprive minority stockholders or members of their representation. How are vacancies filled?

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Green Notes

2014

Commercial Law Prepared by: Atty. Renato Rondez

 Vacancies are filled by the stockholders or members if the cause is: (a) removal; (b) expiration; (c) other causes when the remaining members of the board do not constitute a quorum or leaves the filling up of the vacancy to them; (d) when there is an increase in the number of directors/trustees.  A vacancy can also be filled by the board if the cause of the vacancy is not removal or expiration and the remaining members still constitute a quorum. This can only be exercised by the board if they acting within their term. When is a board member considered as disloyal?  A director is disloyal if by virtue of his office, he acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profit, he must account for it by refunding the same to the corporation, even if the director risked his own funds in the venture, unless, his act is ratified by a vote of the stockholders owning or representing 2/3 of outstanding capital stock. This is also known as the Doctrine of Corporate Opportunity. The provision does not apply if: (a) he acts in good faith, or, (b) the corporation is unable to undertake the opportunity or the same is not essential to the corporation.  The duty of loyalty of a director precludes the director from acquiring an opportunity that is open to the corporation because that is in effect competing with the corporation, oftentimes with the advantage of inside information thus depriving it of the profits that it would have otherwise earned. What is the rule on board compensation?  The general rule is board members are not entitled to

receive any compensation except reasonable per diems.  Exceptions are: (a) when the bylaws provide for compensation; (b) when granted by a majority vote of the stockholders or members subject to the limit that it should not exceed 10% of the net income before income tax during the preceding year; (c) when board members render service as officers. What is the business judgment rule? • The business judgment rule holds that courts will not interfere in the decisions made by the board as regards the internal affairs of the corporation, unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of rights of the minority. When is there solidary liability imposed upon members of the board?  Solidary liability is imposed when: (a) He willfully and knowingly votes for and assents to a patently unlawful act of the corporation; (b) There is gross negligence or bad faith in directing the affairs of the corporation; (c) He acquires any personal or pecuniary interest in conflict of duty; (d) He agrees or stipulates in a contract to hold himself liable with the corporation; or (e) A specific provision of law requires it. What is the special fact doctrine? What is inside information? • It is a doctrine holding that a corporate officer with superior knowledge gained by virtue of being an insider owes a limited fiduciary duty to a shareholder in transactions involving transfer of stock. • Information not known to the public that one has obtained by virtue of being an insider like a director.

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Green Notes

2014

Commercial Law Prepared by: Atty. Renato Rondez

What is the rule on self dealing directors?  The general rule is that a contract between a self dealing director/trustee or officer and the corporation is voidable at the option of the corporation. Notwithstanding, the contract shall be valid when: (a) presence of the director/trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum (b) his vote is not necessary to approve the contract (c) that the contract is fair and reasonable under the circumstances. In the case of an officer, the contract has previously been approved by the board. If however, conditions (a) and (b) are absent, the contract may be ratified by 2/3 vote of the outstanding capital stock in a meeting duly called for such purpose with full disclosure of the adverse interest being made at the meeting and that the contract is nevertheless fair and reasonable. What is the rule on inter-locking directors?  The rule that obtains as far as contracts between corporations with interlocking directors is that the contract is valid as long as there is no fraud and the contract is fair and reasonable. However, if a director’s interest in one corporation is substantial and his interest in the other corporation/s is nominal, the contract shall be subject to the rule on self-dealing directors insofar as the corporation/s where he has a nominal share as it is as if the corporation is transacting with a self dealing director. Shareholdings in excess of 20% of the outstanding capital stock shall be considered substantial. What is the rule on during board meetings?

abstention

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An abstention may have the practical effect of a “no” vote since the motion may fail for lack of sufficient “yes” votes. Unless a greater number is called for in the articles or by-laws, a matter is deemed “approved” by the board if at any meeting at which a quorum is present at least a majority of the required quorum of directors votes in favor of the action.

What is a certificate of stock? What is its nature? What is an uncertificated share?  A certificate of stock is a paper representation or tangible evidence of the stock itself and of various interests therein.  The nature of a certificate of stock is that it is a prima facie proof that the stock described therein is valid and genuine in the absence of an evidence to the contrary.  An uncertificated share is a subscription duly recorded and paid in the corporate books but has no corresponding certificate of stock yet issued. What is involuntary dealing?  It refers to such writ, order or process issued by a court of record affecting shares of stocks which by law should be registered to be effective, and also to such instruments which are not the willful acts of the registered owner and which may have been executed even without his knowledge or against his consent.  An involuntary dealing is required to be registered to constitute constructive notice. What is the right of appraisal?  The right of appraisal is the right of stockholder to demand payment of the fair value of his shares after dissenting from a proposed corporate action involving a fundamental change in

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Green Notes

2014

Commercial Law Prepared by: Atty. Renato Rondez

the corporation in the cases provided for by law.  It is available when (a) articles are amended and such has the effect of changing or restricting the rights of a shareholder or a class of shares or authorizing preferences in any respect superior to those outstanding shares of any class (b) extending or shortening the corporate term (c) in cases of sale, lease, exchange transfer, mortgage, pledge or disposition of all or substantially all of corporate assets or property (d) in cases of mergers/consolidations (e) investment by the corporation in another corporation or business other than its primary purpose (f) a stockholder in a close corporation for any reason may compel the said corporation to allow the exercise of his appraisal right. How is the right of appraisal exercised?  After voting against the proposed corporate action, a written demand must be made on the corporation within 30 days after the date on which the vote was taken for payment of the fair value of his shares.  If no demand is made within 30 days, he is deemed to have waived the exercise of the right.  The stockholder must submit his certificate of stock within 10 days for notation that such shares are dissenting shares.  If the certificate is not submitted for notation within 10 days, the corporation may consider the exercise of the right terminated at its option.  Upon a demand, all rights accruing to the share are suspended including voting rights, only the right to receive the fair value is not suspended, he is then paid. But , if there is no payment within

30 days after the award, he is restored to all his rights.

What are the modes of dissolution?  Voluntary dissolution referring to: (a) where no creditors are affected; (b) where creditors are affected; and (c) by shortening of the corporate term.  Involuntary dissolution referring to: (a) expiration of the corporate term; (b) non-user; (c) continuous inoperation for a period of at least 5 years; (d) legislative action; and (e) SEC action in cases of violation of the Code. What are the modes of liquidation?  A corporation may liquidate within the statutory period through: (a) By the corporation itself or its board of directors or trustees; (b) By a trustee to whom the assets of the corporation had been conveyed; and (c) By a management committee or rehabilitation receiver appointed by the SEC.  A corporation is allowed a 3 year period to enable it to close its business, collect from debtors and settle with creditors. Can liquidation continue beyond the 3 year period?  Liquidation can continue beyond the 3 year period.  Receivers or trustees can act as such beyond the 3 year period.  Pending suits upon expiration of the 3 year period may still be prosecuted by the handling lawyer who will then be constituted as a trustee for such purpose. What are close corporations?  It is one whose articles provide that: (a) 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 or persons not exceeding 20; (b) All the issued stock of all classes shall be subject

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Green Notes

2014

Commercial Law Prepared by: Atty. Renato Rondez

to one or more specified restrictions on transfer; and (c) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. What are some of the characteristics of a closed corporation? • Stockholders may act as directors without need of election, however, they shall assume all obligations and liabilities of directors. • It may have a greater quorum requirement. • Pre-emptive rights extend to all stock issues, even treasury shares. • A stockholder may withdraw and avail of his right of appraisal. What is a deadlock?  It is when the directors or stockholders are so divided respecting the management of the business and affairs of the corporation that the votes required for any corporate action cannot be obtained and as a result, business and affairs can no longer be conducted to the advantage of the stockholders.

When an unlicensed foreign corporation has the capacity to sue  If it is not transacting or doing business in the Philippines, it can sue under: (a)The isolated business transaction rule, (b) A cause of action that is independent of any business transaction, (c) A cause of action that arises out of a business transaction that is not entered into in the Philippines, and (d) A cause of action to protect its name, reputation or goodwill subject to the rule on reciprocity under the IPR. What is a foreign corporation and the basis for our authority over it? • It is a corporation formed, organized or existing under any

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law other than those of the Philippines, and whose laws allow Filipino citizens and corporation to do business in its own country or state. The basis of authority over it is: (a) consent and (b) doing business in the Philippines.

What tests may be applied to determine transacting business in the Philippines?  (a) Continuity test – doing business implies a continuity of commercial dealings and arrangements, and contemplates to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and object of its organization; (b) Subsequent test – a foreign corporation is doing business in the country if it is continuing the body or substance of the enterprise of business for which it was organized; and (c) Contract test – whether the contracts entered into by the foreign corporation, or by an agent acting under the control and direction of the foreign corporation, are consummated in the Philippines. Why is there need for a foreign corporation to obtain a license to transact business?  The purpose of the law in requiring that a foreign corporation doing business in the Philippines to be licensed is to subject it to the jurisdiction of the courts. The object is not to prevent foreign corporation from performing single acts but to prevent it from acquiring a domicile for the purpose of business without taking steps necessary to render it amenable to suits in local courts. Does a foreign corporation possess the personality to sue? To be sued?

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Green Notes

2014

Commercial Law Prepared by: Atty. Renato Rondez

 As a general rule, only foreign corporations that have been issued a license to operate a business in the Philippines have the personality to sue.  By way of exception, a party is estopped to challenge the personality of a foreign corporation to sue, even if it has no license, after having acknowledged the same by entering to a contract with it.  An unlicensed foreign corporation doing business in the country cannot maintain any action but it can be sued. What principles govern a foreign corporation’s right to sue?  The principles governing a foreign corporation’s right to sue are: (a) if it does business without a license, it cannot sue before Philippine courts (b) if it is not doing business, it needs no license to sue before Philippine courts on an isolated business transaction or on a cause of action entirely independent of any business transaction or to protect its name, reputation or goodwill (c) if it does business with the required license, it can sue before Philippine courts on any transaction . When is a dispute with an intracorporate relationship within the jurisdiction of the NLRC? • In the case of Cosare v. Broadcom Asia, Inc, G.R. No. 201298, February 5, 2014, the NLRC was held to have jurisdiction over the dismissal of an AVP for Sales, who was also a stockholder, as he is not a corporate officer whose dismissal is cognizable by the RTC. A corporate officer was defined as one who meets the following: (a) the creation of the position is under the corporation’s charter or by-laws; and (b) the election of the officer is by the directors or the stockholders.

What are the kinds of corporate insolvency? • There are two kinds of insolvency contemplated in it: (1) actual insolvency, i.e., the corporation’s assets are not enough to cover its liabilities; and (2) technical insolvency defined under Sec. 312, i.e., the corporation has enough assets but it foresees its inability to pay its obligation for more than one year. • SEC supervision over corporations • In the case of United Church of Christ in the Philippines, Inc. v. Bradford United Church of Christ, Inc., 674 SCRA 92, it was held that the SEC shall have absolute jurisdiction, supervision and control over all corporations. Even with their religious nature, the SEC may exercise jurisdiction over them in matters that are legal and corporate. Rehabilitation defined • In the case of San Jose Timber Corporation v. SEC, 667 SCRA 13, rehabilitation was defined as “restoration of the debtor to a position of successful operation and solvency.” • A successful rehabilitation depends on 2 factors: (a) positive change in the business fortunes of the debtor, and (b) the willingness of the creditors and shareholders to arrive at a compromise agreement on repayment and the extent of dilution. SECURITIES REGULATION CODE What are securities?  In general, securities are evidences of investment in a common enterprise made with the expectation of deriving a profit solely from the efforts of others who acquire control over the fund invested.  As defined by law, they are Shares, Participation or Interest (SPI) in a Corporation or in a

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Commercial enterprise or Profitmaking venture (CCP) and evidenced by a Certificate, Contract; Instrument, whether written or electronic in character (CCI). What are tender offers?  A Tender Offer is a public offer to purchase a specified number of shares from shareholders usually at a premium in an attempt to gain control of the issuing company. Note that in some instances, the premium is payable only if the offeror is able to obtain the required number of shares.  A Tender Offer disclosure will be required if a person, including a partnership, limited partnership, syndicate, corporation or any other group intends to acquire at least fifteen percent (15%) or at least thirty percent (30%) over a period of twelve months any class of equity security of a listed corporation or any class of equity security of a corporation with assets of at least 50 million and having 200 or more stockholders with at least 100 shares each.

What are proxy solicitations?  Proxy Solicitations is an action to secure the right to vote of so much a number of shares to ensure the approval of a proposed corporate action/s.  The principal purpose of regulating proxy solicitations by requiring the filing of a proxy statement is to provide shareholders with appropriate information to permit an intelligent decision on whether to permit their shares to be voted as solicited for a particular matter at a forthcoming stockholders meeting. What is security price manipulation? • Security price manipulation is an artificial control of security prices. It is an attempt to force securities to sell at prices either above or

below those which would exist as a result of the normal operations of supply and demand. The manipulator hopes to profit by creating fictitious prices at the expense of the general trading public.

What is insider trading?  Insider Trading occurs when an insider sells or buys 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: (a) the insider proves that the information was not gained from such relationship; or (b) 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.

INSURANCE What is the concept of insurance?  Insurance is a means by which one seeks to be covered against the consequences of an event that may cause loss or damage.  The concept is that the premiums that are paid are accumulated in a pool from which payment of claims are to be obtained. As a basis, it is assumed that the people contributing premiums are in excess of those making claims resulting in a larger pool of money than the amounts being claimed What are pure and speculative risks? • The risks that may be insured against are what are known as pure risks as opposed to speculative risks.

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•

•

A pure risk is whether a person will suffer or will not suffer a loss from the occurrence of an event. A speculative risk is whether a person will profit or suffer a loss from the occurrence of an event.

Insurance is risk distributing • Insurance is a risk distributing device because when the insurer assumes the risk, it is distributing potential liability, in part, among others. • It is not risk shifting because the entirety of risk of loss is not shifted to another. What is the nature of a health care agreement? • In the case of Fortune Medicare, Inc. v. Amorin, G.R. No. 195872, March 12, 2014, it was held to be in the nature of non-life insurance, which is primarily a contract of indemnity. Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingency, the health care provided must pay for the same to the extent provided under the contract. • The Court also interpreted an ambiguity in favor of the insured allowing him to recover for his medical expenses incurred while abroad. • In marine insurance, what is meant by perils of the sea and perils of the ship? • Perils of the sea refers to all kinds of marine casualties and damages done to the ship or goods at sea by the violent action of the winds or waves, one that could not be foreseen and is not attributable to the fault of anybody. • Perils of the ship are losses or damages that result from (a) natural and inevitable action of the sea (b) ordinary wear and tear of the ship (c) negligent failure of the ship owner to provide the vessel with the proper equipment

to convey the cargo ordinary conditions.

under

What matters when concealed, do not vitiate a marine insurance policy?  The concealment of the following matters will not vitiate the policy but will merely exonerate the insurer in case of a loss are: (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 the necessary documents (e) the use of false/simulated documents. What are the implied warranties in marine insurance?  In every contract of marine insurance upon a ship or freight, freightage or upon anything which is the subject of marine insurance, there are implied warranties: (a) that the ship is seaworthy; (b) It shall carry the requisite documents to show its nationality or neutrality and that it shall not carry any document that will cast reasonable suspicion on the vessel; (c) That the vessel shall not make any improper deviation; and (d) That the vessel does not or will not engage in any illegal venture. When is the implied warranty of seaworthiness complied with?  The implied warranty of seaworthiness is complied with as a general rule when it is seaworthy at the time of the commencement of the risk except (a) when the insurance is made for a specified length of time, it must be seaworthy at the commencement of every voyage it undertakes at that time (b) when the insurance is upon cargo, which by the terms of the policy, description of the voyage, or established custom of trade, is

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required to be transshipped at an immediate port, in which case – each vessel upon which the cargo is shipped or transshipped must be seaworthy at the commencement of each particular voyage (c) where different portions of the voyage contemplated in the policy differ in respect to the things requisite to make the ship seaworthy, in which case it must be seaworthy at the commencement of each portion.

When is a deviation proper? Improper?  A deviation is proper: (a) When it is caused by circumstances over which neither the master nor the owner of the ship has any control. (b) When necessary to comply with a warranty, or to avoid a peril, whether or not the peril is insured against. (c) When made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril. (d) When made in good faith, for the purpose of saving human life or relieving another vessel in distress  Any deviation that consists of a departure from the course of the voyage as defined by law or an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage is an improper deviation and the insurer will not liable for any loss happening to the thing insured subsequent to it, regardless of whether the risk was increased or diminished. What constitutes an actual total loss?  An actual total loss occurs when there is : (a) total destruction of the thing insured; (b) an irretrievable loss of the thing by sinking or by being broken up; (c) any damage to the thing which renders it valueless to the owner for the purpose that he held it; or (d) any other event which

effectively deprives the owner of the possession, at the port of destination, of the thing insured.

What is a constructive total loss?  A constructive total loss occurs when(a) more than ¾ thereof in value is actually lost or would have to be expended to recover it from the peril (b) if it is injured to such extent as to reduce its value by more than ¾ of value (c) if the thing injured is a ship, and the contemplated voyage cannot lawfully be performed without incurring either an expense to the insured of more than ¾ the value of the thing abandoned or a risk which a prudent man would not take under the circumstances (d) if the insured is freightage or cargo and the voyage cannot be performed, nor another ship procured by the master, within a reasonable with reasonable diligence to forward the cargo without incurring the like expense or risk mentioned in item (c) but freightage cannot be abandoned unless the ship is also abandoned. When does co-insurance exist? • Co-insurance exists when the subject matter is insured for an amount less than it value. In this case, the insured is considered as a co-insurer for the portion not covered by insurance. • This will apply only if the loss is partial. • This is also known as the “average clause.” What is the rule on liability for an average?  As a rule, when it has been agreed that an insurance upon a particular thing or class of things shall be free from a particular average, a marine insurer is not liable for a particular average loss not depriving the insured at the port of destination, of the whole such thing, or class of things, even

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though it becomes entirely worthless, but such insurer is liable for his proportion of all general average loss assessed upon the thing insured.

What is fire insurance? • Is insurance against loss by through a hostile fire. • A fire is hostile when it: (a) burns at a place where it is not intended to burn (b) is friendly but becomes hostile because it escapes from the place where it is intended to burn and becomes uncontrollable (c) is a friendly fire which becomes hostile because of the unsuitable material used to light it and it becomes inherently dangerous and uncontrollable. What is an alteration? • An alteration is a change 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 risk, which entitles the insurer to rescind the contract of insurance. What is casualty insurance?  Generally, it is one that covers loss or liability arising from an accident or mishap, excluding those that fall exclusively within other types of insurance like fire or marine insurance.  It includes employer’s liability, workmen’s compensation, public liability, motor vehicle liability, plate glass liability, burglary and theft ,personal accident and health insurance as written by non-life companies, and other substantially similar insurance. Can a CBA provision be interpreted as an insurance contract? • In the case of Mitsubishi Motors Philippines Salaried Employees Union v. Mitsubishi Motors

•

Philippines Corporation, G.R. No. 175773, June 17, 2013, a CBA provision providing for an MMPC obligation to pay for the medical expenses of MMPSEU dependents was considered as a non- life insurance contract and interpreted as a contract of indemnity. This interpretation barred the application of the “collateral source rule,” which disallows a wrongdoer from claiming a benefit arising from a contract which the injured party may have with third persons to lessen his liability. In this case, MMPC is not the wrongdoer, rather, it is a no-fault insurer.

What is suretyship?  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 3 rd party called the obligee.  It is deemed to be an insurance contract when made by a surety who or which, as such, is doing an insurance business as provided by the Insurance Code.  The liability of the surety is solidary with the obligor but limited to the amount of the bond and determined strictly by the terms of the contract in relation to the principal contract between obligor and obligee. What is life insurance?  It is insurance on human lives and insurance appertaining thereto or connected therewith. It is payable on: (a) death of the person, unless excepted or (b) surviving a specified period, or (c) contingently on the continuance or cessation of life.  Suicide is generally not compensable unless committed after the policy has been in force for a period of two years from date of issue or last reinstatement

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or a shorter period if provided, or if committed in a state of insanity.

What is covered by compulsory third party motor vehicle liability insurance?  It provides protection or coverage to answer for bodily injury or property damage that may be sustained by another arising from the use of a motor vehicle.  It is an insurance policy that directly insures against liability. The insurer’s liability accrues immediately upon the occurrence of the injury upon which liability depends, and does not depend on the recovery of judgment by the injured party against the insured. What is a “no fault indemnity claim”?  A no fault indemnity claim is a claim for payment for death or injury to a passenger or third party without necessity of proving fault or negligence.  This is payable by the insurer provided (a) indemnity in respect of one person shall not exceed PHP 15,000.00, and (b) the necessary proof of loss under oath to substantiate the claim are submitted.  A claim under the no fault indemnity clause may be made against one motor vehicle insurer only as follows: (a) in case of an occupant of a vehicle- against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from (b) in any other case, from the insurer of the directly offending vehicle (c) in all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained. How is the “authorized driver” defined?  The authorized driver clause is interpreted to refer to the insured

or any person driving on the order of the insured or with his permission provided, such person is permitted to operate a motor vehicle in accordance with our licensing laws or regulations and who is not otherwise disqualified.  When the insured is the one driving the vehicle, a license is not necessary. He has a right to recover the damage even if he has no driver’s license or that the same had expired at the time of the accident.

How can the theft clause be interpreted?  In the case of Paramount Insurance Corporation v. Spouses Yves and Maria Teresa Remondeulaz, G.R. No. 173773, November 28, 2012 the respondents entrusted possession of their vehicle only to the extent that Sales will introduce repairs and improvements thereon and not to permanently deprive them of possession thereof. Since theft can also be committed by misappropriation, the fact that Sales failed to return the subject vehicle to the respondents constitutes Qualified Theft. Hence, since the respondents’ car is undeniably covered by a Comprehensive Motor Vehicle Insurance Policy that allows for recovery in cases of theft, petitioner is liable under the policy for the loss of respondents’ vehicle under the "theft clause.” When is there insurable interest?  Insurable interest will exist when the insured has such a relation or connection with, or concern in, such subject matter that he will derive pecuniary benefit or advantage from its preservation or will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against.

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What differentiates insurable interest in life from that in property?  Insurable interest in life can be based on consanguinity, affinity, contract or a pecuniary interest, while insurable interest in property is based on pecuniary interest.  Insurable interest in life must exist only at the effectivity of the contract except that taken by a creditor on the life of the debtor while insurable interest in property must exist at the time of effectivity of the contract and when loss occurs, although it may not exist in the meantime.  The value of insurable interest in life is not limited unless taken by a creditor on the life of the debtor while insurable interest in property is limited to the actual value of the interest in the property. Who has insurable interest in life?  Himself, his spouse and of his children.  Any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest.  Any person under a legal obligation to him for the payment of money, respecting property or services, of which death or illness might delay or prevent erformance.  Any person upon whose life, any estate or interest vested in him depends. What does insurable interest in property consist of?  An existing interest.  An inchoate interest founded on an existing interest.  An expectancy, coupled with an existing interest in that out of which the expectancy arises.  A carrier or depository of any kind has insurable interest in the thing held by him as such to the extent of his liability but not to exceed the value thereof.

What can and cannot be insured against? • Any unknown or contingent event, whether past or future, which may damnify a person having insurable interest or create a liability against him may be insured against. • Insurance for or against the drawing of any lottery or for or against any chance or ticket in a lottery drawing a prize cannot be acquired. Who will qualify as an insured? • Anyone except a public enemy or a nation at war with the Philippines and every citizen or subject of such nation may be insured. Who will qualify as a beneficiary? • In life insurance, anyone, except those who are prohibited by law to receive donations from the insured. • In property insurance, only the insured with insurable interest will qualify as a beneficiary. • In insurance against liability, the party in whose favor liability exists is the beneficiary. When is there multiple insurable interest? • Multiple insurable interest exists when more than one insurable interest may exist in the same property. • Examples are that of: (a) mortgagor and mortgagee (b) a trustor and trustee (c) a lessor and a lessee

What is double insurance? Over insurance?  Double insurance exists where the same person is insured by several insurers separately in respect to same subject and interest.  Its requisites are: (a) same person is insured (b) there are several

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insurers (c) subject insured is the same (d) interest insured is the same (e) risk or peril insured against is the same.  Over insurance occurs when property is insured for an amount in excess of its value.

the thing insured is exposed to the peril insured against.  The payment of a premium is essential to the validity of an insurance policy is known as the “cash and carry basis” or “no premium payment no policy” rule.

When is an insurance contract perfected? • It is perfected when the assent or consent is manifested by the meeting of the minds of the offer and acceptance upon the thing and the cause which are to constitute the contract.

When is insurance effective despite non-payment of the premium?  This occurs: (a) in case of life or industrial life where the premium is payable monthly or oftener, whenever the grace period applies; (b) when the insurer makes a written acknowledgment of the receipt of premium, such is conclusive evidence of the payment of the premium to make it binding notwithstanding any stipulation therein that it shall not be binding until the premium is paid; and (c) where the obligee has accepted the bond or suretyship contract.  It also occurs when the insurer is estopped from claiming otherwise.

How is an offer and acceptance made in life or health insurance?  If the premium is not paid when the insurance is applied for, it is an invitation to the insurer to make an offer which the insured must accept. If a premium is paid with the application, it is considered an offer.  Acceptance occurs when a policy is issued strictly in accordance with the offer. If otherwise, the insurer is making an offer, which the insured can accept or reject.  Unreasonable delay in the return of the premium raises a presumption that the offer has been accepted. How is an offer and acceptance made in property and liability insurance? • When the insured applies for the insurance, he is already making an offer to the insurer, who may now, accept, reject or make a counteroffer. • Acceptance occurs in the same manner as in life and health insurance. What is meant by the premium and why must it be paid?  The premium is the agreed price for assuming and carrying the risk which the insurer is entitled to the payment of a premium as soon as

What are the non-default options in life insurance? • The non-default options are: (a) grace period (b) cash surrender value (c) paid up insurance (d) automatic loan clause, and (e) reinstatement How is reinstatement of the policy effected? • Reinstatement can be permitted within 3 years, or a stipulated longer period, from the date of default. • This is not an absolute right as it is conditioned on insurability of the insured or evidence of good health and the payment of all overdue premiums and indebtedness, if any. What is concealment and its requisites?  Concealment is a neglect to communicate that which a party knows and ought to communicate.

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 Its requisites are: (a) such facts that must be within his knowledge as concealment requires knowledge of the fact concealed by the party charged with concealment (b) fact/s must be material to the contract as it must be of such nature that had the insurer known of it, it would not have accepted the risk or demanded a higher premium (c) that the other party had no means of ascertaining such fact/s (d) that the party with a duty to communicate makes no warranty.

by the insured to the insurance company, tending to induce the insurer to take the risk.  Representations may be oral or written.  They can be affirmative when it is an affirmation of a fact existing when the contract begins or promissory when it is a statement by the insured concerning what is to happen during the term of the insurance.

When is there a waiver of information? • A waiver takes place either, by the terms of the insurance or by the neglect to make inquiries as to such facts where they are distinctly implied in other facts of which information is communicated.

Is a representation part of the insurance contract? • A representation does not form part of the contract as an express provision thereof as it is a collateral inducement to the same. • While it does not form part of the contract, it may qualify an implied warranty.

What is the effect of concealment and when must it take place?  Whether intentional or not, it entitles the injured party to rescind the contract of insurance.  Generally, concealment requires a party to have knowledge of the fact concealed prior to or at the effectivity of the policy.  Information acquired after effectivity is not concealment and does not constitute ground to rescind the policy, as after the policy is issued, information subsequently acquired is no longer material as it will not affect or influence the party to enter into contract. However, in case of the reinstatement of a lapsed policy, facts known after effectivity but before reinstatement must be disclosed.

To what date does a representation refer to?  It presumed to refer to the date on which the contract goes into effect.  There is no false representation if it is true at the time the contract takes effect although false at the time it is made.  There is a false representation, if it is true at the time it is made but false at the time the contract takes effect.

What are representations? What are the kinds of representations?  A representation is an oral or written statement of a fact or a condition affecting the risk made

When is a representation false and what is its effect?  A representation is said to be false when the facts fail to correspond with its assertions or stipulations.  If it is false on a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time the representation becomes false.  However, the right to rescind is considered waived by the acceptance of premium payments

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despite knowledge of the ground to rescind.  There is no waiver, if the insurer had no knowledge of the ground at the time of the acceptance of the premium.

How is concealment distinguished from misrepresentation? • Concealment is the neglect of one party to communicate to the other material facts. The information he gives in compliance with his duty to reveal information is representation. What is the incontestability clause ?  It is a clause in a life insurance policy that is (a)payable on the death of the insured, and (b) which has been in force during the lifetime of the insured for a period of 2 years from the date of issue or its last reinstatement that would prevent the insurer from proving that the policy is void ab initio or is subject to rescission by reason of a fraudulent concealment or misrepresentation of the insured or his agent. What is a warranty? What are the kinds of warranties?  It is a statement or promise stated in the policy or incorporated therein by reference, whereby the insured, expressly or impliedly contracts as to the past, present or future existence of certain facts conditions or circumstances, the literal truth of which is essential to the validity of the contract.  Warranties can be affirmative when they refer to to matters that exist at or before the issuance of the policy or promissory when they refer to promises or undertaking of the insured that certain matters shall exist or will be done or will be omitted after the policy takes effect.  They can also be express when provided for in the policy or

implied when they are inferred from the nature of the insurance.

What is the effect of a violation of a warranty?  The violation of a material warranty, or other material provision of the policy, on the part of either party thereto, entitles the other to rescind.  However, a breach of a warranty without fraud, merely exonerates an insurer from the time it occurs, or where it is broken at its inception, prevents the policy from attaching to the risk. When is the non-performance of a warranty excused? • The non-performance of a promissory warranty is excused if before the arrival of the time for performance: (a) the loss insured against happens;(b) the performance becomes unlawful at the place of the contract; or (c) the performance becomes impossible. What are the rules on losses?  Loss of which a peril insured against is the proximate cause, although a peril not contemplated by the contract may have been a remote cause but the insurer is not liable for a loss of which the peril insured against was only a remote cause.  Loss caused by efforts to rescue the thing insured from a peril insured against that would otherwise have caused a loss, if in the course of such rescue, the thing is exposed to peril not insured against, which permanently deprives the insured of its possession, in whole or in part, or where a loss is caused by efforts to rescue the thing insured from a peril insured against.  An insurer is not liable for a loss caused by the willful act or through the connivance of the insured; but he is not exonerated

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by the negligence of the insured, or of the insured’s agent or others.

What is a notice of loss, who and when should it be given? • A notice of loss is the formal notice given by the insured or some person entitled to the benefit of the insurance without unnecessary delay informing the insurer of the occurrence of the loss insured against. What is meant by proof of loss? • It refers to the evidence given by the insured to the insurer upon the occurrence of the loss by insured against, stating the particulars and the necessary data to enable the insurer to determine its liability and the extent thereof. What is claim settlement? • This refers to the indemnification of the loss suffered by the insured. • The claimants entitled to the indemnification may be the insured, the reinsured, the insurer entitled to subrogation, or a third party in an insurance policy providing indemnity against liability. What is unfair claim settlement?  Knowingly misrepresenting facts or policy provisions.  Failing to acknowledge pertinent communications with reasonable promptness.  Failing to adopt and implement reasonable standards for prompt investigation of claims.  Not attempting to effectuate prompt, fair and equitable settlement of claims in cases where liability is reasonably clear.  Compelling policy holders to file suit by offering amounts substantially less than that which they are entitled to. What is the effect of a fraudulent claim?

 In the case of United Merchants Corporation v. Country Bankers Insurance Corporation, G.R. No, 198588, July 11 2012, the Supreme Court held that: Where a fire insurance policy provides that “if the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or if any fraudulent means or devices are used by the insured or anyone acting in his behalf to obtain any benefit under the policy” and the evidence is conclusive that the proof of the claim which the insured submitted was false and fraudulent as both as to kind, qualify and amount of the goods and their value destroyed by fire, such proof of claim is a bar against the insured from recovering on the policy even for the amount of his actual loss. It has long been settled that a false and material statement made with intent to deceive or defraud voids on insurance policy, In Yu Cua v. South British Insurance Co., the claim was fourteen times bigger than the real loss; In Go Lu v. Yorkshire Insurance Co., eight times; and in Tuason v. North China Insurance Co., six times. In the present case, the claim is twenty five times the actual claim proved.

What is the prescriptive period for the commencement of an action?  The parties can agree on a period provided it is not less than 1 year from the time the cause of action accrues.  If the period prescribed void because it is less than 1 year or there is no period, the insured can bring the action within 10 years from the time the cause of action accrues.  In a comprehensive motor liability insurance claim, a written notice of claim must be filed within 6 months from the date of accident,

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otherwise, the claim is waived, even if an action is subsequently brought within 1 year from rejection of the claim.

When does subrogation take place? • Subrogation inures to the insurer without need of assignment or express stipulation upon payment made to the insured. The act of payment makes the insurer a subrogee in equity. • However, subrogation occurs only in property insurance. What is the concept behind subrogation?  In the case of Malayan Insurance Co., Inc. vs Rodelio Alberto and Enrico Alberto Reyes, GR No. 194320, February 1, 2012 it was held that subrogation is the substitution of one person by another with reference to a lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities. The payment by the insurer to the insured operates as an equitable assignment to the insurer of all the remedies that the insured may have against the third party whose negligence or wrongful act caused the loss.  The right of subrogation is not dependent upon, nor does if grow out of, any privity of contract. It accrues simply upon payment by the insurance company of the insurance claim. •

It is intended to make the person who caused the loss legally responsible for it, prevents the insured from recovering twice, and upholds public policy by preventing tortfeasors from being absolved from liability.

NEGOTIABLE INSTRUMENTS When is there an unconditional order or promise to pay? • The promise or order is still unconditional though coupled with:(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. • The test of negotiability when there is another stipulation is whether or not the promise would give rise to a cause of action for breach of contract if the additional act is not done. If it does, the instrument is rendered nonnegotiable. What is the fictitious payee rule?  When it is payable to the order of a fictitious or non-existing person, the instrument’s being payable to bearer depends on the intention of the person making it so payable.  An actual, existing, and living payee may also be “fictitious” if the drawer did not intend for the payee in fact to receive the proceeds of the check. If this is absent, the effect is that the instrument cannot be considered as payable to bearer. How are conflicts between words and numbers resolved? • In the case of People v. Romero, 306 SCRA 90, the drawer of a check with a balance of PHP 1,144,760.00 could not be convicted for estafa because of the dishonor of his check for lack of funds where the check indicated the amount of PHP 1,000,200.00 in words and the amount of PHP 1,200,000.00 in figures as the NIL provides that in resolving this ambiguity the amount in words should prevail.

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What is meant by absence of a consideration ?  The meaning of absence or want of consideration means a total lack of any valid consideration for the contract, in consequence of which the alleged contract must fall. Consequently, if the Maker makes a promissory note to the Payee in payment for a parcel of land which does not exist. As between the parties, there can be no recovery on the note as there is absence of consideration. But if the Payee indorses the note to another, who is a holder in due course, there can be recovery from the Maker because absence of consideration is only a personal defense not available against a holder in due course. Who is an 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.  The requisites to be an accommodation party are: (a) The party to the instrument signs as maker, drawer, acceptor or indorser (b) Without receiving value therefor, and (c) For the purpose of lending his name to some other person. What are the effects of forgeries?  The effects of a forgery are: (a) The instrument is not declared totally void nor are the genuine signatures thereon rendered inoperative. It is only the forged signature that is declared inoperative. Hence: rights still exist and may be enforced by

virtue of the instrument as between parties whose signatures were not forged, and (b) A forged instrument just prevents any subsequent party from acquiring any rights as against any party whose name appears prior to the forgery. There is no right to retain the instrument, or to give discharge or to enforce payment. However, rights will exist and may be enforced as between subsequent parties but no one can acquire a right as against parties prior to the forgery, who also have rights and may enforce them as against each other. When is the drawer is liable for a forgery? • In the case of Security Bank and Trust Corporation v. Triump Lumber and Construction Corporation, 301 SCRA 537 it was held that a drawer who discovered the loss of his checkbook and did not notify the bank of the loss should bear the loss caused by the subsequent payment of the checks in which the signature of the drawer had been forged. Is the payee on a check with a forged endorsement allowed to recover?  The payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. When a debtor does not deliver the check to his creditor and a third party was able to collect the proceeds by forging the endorsement of the payee, the payee has no cause of action against anyone on the basis of the check due to the absence of delivery. However, in the case of Westmont Bank v. Ong, 375 SCRA 212, the payee of the check can sue the collecting bank to whom the check was deposited despite absence of delivery to the payee in order to avoid circuitry of suits. What is a material alteration?

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 A material alteration is any alteration which changes: (a)The date (b)The sum payable, either for principal or interest (c) The time or place of payment (d) The number of the relations of the parties (e)The 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, or any other change or addition which alters the effect of the instrument in any respect.  Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. What is the effect of an alteration of the serial number? • The alteration of the serial number of the check is not material and does not entitle the drawee bank which paid it to recover the payment. The alteration of the serial number of the check did not change the relations between the parties nor the effect of the instrument. • The drawee bank has no right to dishonor the check and return it to the collecting bank. Who is an irregular indorser?  An irregular indorser is one whose signature is out of place. Instead of the expected signature of a party to the instrument, the signature of the irregular indorser is found in its place.  Where 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 the following rules: (a)If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent

parties, (b)If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer, (c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.

What is effect of the crossing or striking out of indorsements?  When a holder strikes 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.  An instrument payable to bearer can be negotiated by mere delivery. Even if a bearer instrument is indorsed specially, the same continues to be negotiated by mere delivery. Hence, the special indorsement of a bearer instrument is not necessary to the title of the holder. Such being the case, the holder may strike out said indorsement at any time.  An instrument payable to order can be negotiated by indorsement completed by delivery. However, if the only or last indorsement is an indorsement in blank the order instrument is converted to one which is payable to bearer. All special indorsements subsequent to the blank indorsements may be stricken out by the holder because they are not necessary to this title.  However, in the case of an instrument payable to order with special indorsements all the way up to the holder, the later cannot strike out any of the special indorsements because all of them are necessary to his title. This is so because the holder must be able to trace his title to the instrument through an unbroken chain of indorsements.

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Who is 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 had 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. What is meant by good faith? • It means that it is required that at the time the holder purchased the instrument there must be total absence of knowledge on the part of the holder regarding any infirmity in the instrument or defect of title of the person negotiating it. • If the instrument was issued for an unlawful consideration, or the indorser was guilty of an illegal act or ill-motive in negotiating the instrument, the holder must not be aware of any of them at the time he took the instrument. What is meant by defects or infirmities?  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.  Infirmity in the instrument means that something is wrong with the instrument itself like a forgery or material alteration.

How does the prima facie presumption that one is a holder in due course apply?  Every holder of a negotiable instrument is deemed prima facie a holder in due course.  The presumption that every holder is deemed prima facie to be a holder in due course, arises only in favor of a person who is a holder in the sense defined in Section 191 of the NIL, that is, a payee or indorsee who is in possession of the instrument, or the bearer thereof.  There is no presumption that a person through whose hands an instrument has passed was a holder in due course. What are the rights of a 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.  Specifically: (a) He may sue in his own name (b) He may receive payment, and payment to him in due course discharges the instrument (c) He holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves (d) He may enforce payment of the instrument for the full amount thereof against all parties liable thereon. When is an instrument is subject to original defenses?  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 non-negotiable. However, 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

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instrument, has all the rights of such former holder in respect of all parties prior to the latter.  A holder who is not a holder in due course, holds the instrument subject to the defenses that may be raised against the person who transferred the instrument to him. Hence, it is as if the instrument is non-negotiable because the transferee cannot acquire rights better than those of the transferor. In this case, the transferee is a mere assignee of the rights of the transferor.

What are the warranties of the maker?  His warranties are: (a)He will pay the promissory note according to its tenor (b)He admits the existence of the payee; and (c) He admits that the payee has the capacity to indorse.  The maker is the one who executed the promissory note. He is the person primarily liable thereon. His liability is absolute and unconditional in accordance with the terms of the promissory note that he made. He cannot vary its terms.  The maker cannot deny the existence of the payee. He cannot allege that the payee is fictitious person.  The maker is estopped from contesting the capacity of the payee to indorse. For instance, he cannot allege that the payee is a minor, or insane. If the payee is a corporation, he cannot allege that its indorsement is ultra vires. What are the warranties of the drawer?  His warranties are: (a) He admits the existence of the payee and his then capacity to indorse. Note that this is the same as the maker (b) He engages that, on due presentment, the bill will be accepted or paid, or both, according to its tenor (c) That if it

is dishonored by non-acceptance or non-payment, he will pay to the holder of the bill or to any subsequent indorser who was compelled to pay it, provided the necessary proceedings on dishonor were duly taken.  To fix the liability of the drawer, the following steps must be taken: (a)Due presentment of the bill of exchange to the drawee, the person to whom the bill is addressed. It may be presentment for acceptance, or presentment for payment; whichever is necessary under the premises, (b)If dishonored, the necessary proceedings on dishonor must be taken. Both steps must concur; otherwise, the drawer will be discharged from liability.  The drawer may negative or limit his liability to the holder by inserting a provision to that effect in the instrument; e.g., “In case of dishonor, I am not liable for the amount of this instrument

What are the warranties of the acceptor?  The warranties of the acceptor are: (a) He will pay the bill according to the tenor of his acceptance; (b)He admits the existence of the drawer; (c)He admits that the signature of the drawer is genuine; (d) He admits the capacity of the drawer; (e) He admits that the drawer has the authority to draw the instrument; and (f)He admits the existence of the payee and his then capacity to indorse.  The acceptor need not accept according to the tenor of the instrument. He can vary the terms of the instrument such that he can become liable only according to his own terms. However, he is absolutely required to pay according to the tenor of his acceptance.

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What are the warranties of person negotiating by delivery or qualfied indorsement?  Every person negotiating an instrument by delivery or by a qualified indorsement warrants: (a) That the instrument is genuine and in all respects what it purports to be (b) That he has a good title to it (c) That all prior parties had capacity to contract (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless.  When the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. When it is by qualfied indorsement the liability extends to all parties who derive title through his indorsement.

What are the warranties of a general indorser?  A general indorser has the same warranties as a qualified indorser except that he warrants that the instrument is, at the time of his indorsement, valid and subsisting.  In addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.  A qualified indorser warrants that he is not aware of any fact which will impair the validity of the instrument or render it valueless; whereas, a general indorsers warrants that the instrument is valid and subsisting, meaning that there is no fact which will impair the validity of the instrument or render it valueless, regardless of whether he is aware of it or not.  If the instrument is dishonored, the qualified indorser is not liable

if he did not violate his warranties. In the case of a general indorser, if the instrument is dishonored, he engages to pay the amount of the instrument to the holder or to whomsoever may be compelled to pay it, provided there is due presentment and the necessary proceedings on dishonor are duly taken; otherwise, the general indorser will be discharged from liability.

When is presentment for acceptance required?  Presentment for acceptance must be made by the holder where: (a) bill is payable after sight or where presentment is necessary to fix maturity (b) it is expressly stipulated, or (c) the bill is drawn payable elsewhere other than the residence or place of business of the drawee so that the drawee can make arrangements for payment. In no other case is presentment for acceptance necessary in order to render a party to the bill liable.  Hence, presentment for acceptance is not necessary for bills: (a) payable on demand (b) payable at sight (c) payable on a fixed date (d) payable several days after date (e) payable upon occurrence of an event, or (f) payable several days after occurrence of an event. What is required is simply presentment for payment. When is presentment for payment required? • There is need for presentment for payment upon the proper person as it is necessary to charge persons secondarily liable on the instrument. Failure to present the instrument for payment to the person primarily liable thereon will discharge the drawer and indorsers from any liability, unless presentment is excused or dispensed with pursuant to the

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provisions of Sections 79, 80, 81 or 82 of the NIL.

When is presentment for payment dispensed with or excused?  Presentment is dispensed with when: (a)Presentment for payment is not required in order to charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument,(b) Presentment is not required in order 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, (c)Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay cases to operate, presentment must be made with reasonable diligence.  Presentment for payment is excused when: (a) after the exercise of reasonable diligence, presentment, as required by the NIL cannot be made (b) Where the drawee is a fictitious person (3) By waiver of presentment, express or implied.

When is notice of dishonor given?  When a negotiable instrument has been dishonored by nonacceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged.  A notice of dishonor is necessary in order to fix the liabilities of parties secondarily liable on the instrument. The drawer and the indorser must be given a notice of dishonor once the instrument is

dishonored pursuant to the warranties they made when they affixed their signatures on the instrument.  The parties primarily liable on the instrument need not be given a notice of dishonor because they were the ones who dishonored the instrument.  The drawee need not be given a notice of dishonor because he is not party to the instrument until he accepts.

What are the exceptions to the rule on failure to give notice of dishonor?  Where there is a waiver of notice of dishonor which may occur 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.  Where it is dispensed with, after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. When is notice of dishonor not required to be given the drawer?  Notice of dishonor is not required to be given to the drawer in either of the following cases: (a)Where the drawer and drawee are the same person (b)When the drawee is a fictitious person or a person not having capacity to contract (c) When the drawer is the person to whom the instrument is presented for payment (d)Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument (e)Where the drawer has countermanded payment.  As a general rule, notice of dishonor need not be given to the drawer in instances where he knows or ought to know that the bill of exchange has been dishonored or will be dishonored. To put it simply, the drawer is not

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entitled to be notified about something he already knows.  Further, if the drawee is a fictitious person or one without capacity to contract, the holder can treat it as a promissory note. Thus, the drawer is treated as a maker, who as such, is primarily liable.

When is notice of dishonor not required to be given to an indorser? • Notice of dishonor is not required to be given to an indorser in the following cases: (a) When the drawee is a fictitious person or not having capacity to contract, and the indorser was aware of that fact at the time he indorsed the instrument (b) Where the indorser is the person to whom the instrument is presented for payment (c) Where the instrument was made or accepted for his accommodation. • The indorser need not be notified where he knows or ought to know that the instrument will be dishonored. What is the effect of NonAcceptance?  Where due notice of dishonor by non-acceptance has been given, notice of a subsequent dishonor by non-payment is not necessary unless in the meantime the instrument has been accepted.  This is so because there is no reason to expect that the same bill will be paid upon its maturity; hence, there is no need to notify the drawer and indorsers again about the dishonor of the bill by non-payment.  However, if before its maturity, the bill is accepted but later dishonored by non-payment upon its maturity, the drawer and the indorsers must be given due notice of dishonor by nonpayment; otherwise, they will be discharged from liability. This is so because the earlier notice of dishonor by non-acceptance given

the drawer and indorsers was rendered ineffectual by the subsequent acceptance of the bill. Hence, the necessity of the notice of dishonor by non-payment that must be given to fix the liability of the drawer and the indorsers.

How is a foreign bill distinguished from an inland bill?  A bill of exchange may be a foreign bill of exchange where the drawer and the drawee are residents of countries foreign to each other or an inland bill of exchange where the drawer and drawee are residents of the same country as on its face it purports to be, both drawn and payable within the Philippines and unless the contrary appears on the face of the bill, the holder may treat it as an inland bill. The distinction is material insofar as determining whether protest is to be given in the case of non-acceptance or dishonour by non-payment as only foreign bills of exchange is subject to protest. What is the effect of the certification of a check? • A check will operate as an assignment of funds when the bank accepts or certifies the check. • Certification of the check is equivalent to acceptance and when the holder procures it to be certified, the drawer and all indorsers are discharged from liability thereon. • When a bank certifies a check it agrees in advance to (a) accept the check when it is presented for payment (b) pay the check out of the funds set aside for the customer’s account. What is meant by the discharge of the negotiable instrument and how does it occur?  It is the release of all parties, whether primary or secondary,

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from their obligation on the instrument.  It occurs: (a) By payment in due course by or on behalf of the principal debtor, (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation, (c) By the intentional cancellation thereof by the holder, (d) By any other act which will discharge a simple contract for the payment of money, and (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

How are those secondarily liable on the instrument discharged?  Those secondarily liable will be discharged: (a) By any act which discharges the instrument, (b) By the intentional cancellation of his signature by the holder, (c) By the discharge of a prior party, (d) By a valid tender or payment made by a prior party, (e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is expressly reserved, and (f) 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.

TRANSPORTATION What are the Constitutional provisions affecting transportation?  Section 11, Article XII- National Economy and Patrimony provides that the grant of any franchise or any form of authorization to operate a public utility is limited to

Filipinos or Filipino corporations owned at least 60% by Filipinos.  The mere formation of a public utility corporation does not ipso facto characterize it as one that is operating a public utility. The moment of determination of Filipino nationality is when it applies for a franchise to operate a public utility.

What is the basis of state regulation? • Since the business and operation of a public utility is imbued with public interest, it must submit to government regulation and surrender certain business prerogatives, including determining the amount of rates that they can charge as the State must protect the public whenever too much profits become the priority of public utilities. What are the rate determination factors? • The three major factors are: (a) rate of return , (b) rate base, and (c) return itself or the computed revenue to be earned using the (a) and (b). • Jurisprudence has consistently adopted a 12% rate of return. • The rate base is an evaluation of the property devoted to the public service or value of invested property which is entitled to a return. What is the degree of diligence required of common carriers?  Regardless of whether the object are goods or passengers, a common carrier must observe extra ordinary diligence.  The is required because of the nature of the business and by reason of public policy.  If loss, destruction or deterioration of the goods occurs or death or physical injuries is suffered by a passenger, there is a presumption of negligence that arises.

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 If the damage does not fall within the instances stated, it does not mean that there is no recovery against the common carrier. The grounds for recovery will have to be proven as there is no presumption of negligence that arises. An example would be damages due to a delay in delivery.

What are the effects of the acts of the employees of the common carrier?  The common carrier is also liable if the death or injury arises from the negligence or willful acts of its employees, although the employees may have acted beyond the scope of their authority or in violation of orders. If the act is not in the line of duty, the rule on strangers or passengers will apply.  This liability extends only to acts which the carrier could foresee or avoid through the exercise of the degree of diligence required and neither can it be eliminated or limited by stipulation, by the posting of notices, by statements on the ticket or otherwise.  However, in a like manner the passenger must observe the diligence of a good father of a family to avoid injury to himself What are the effects of the acts of strangers or passengers on the common carrier? • The rule on strangers or other passengers holds that the common carrier is liable for injuries suffered by a passenger on account of the wilful acts of other passengers or 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. How is the earning capacity of a student determined?

 In the case of Spouses Teodoro and Nannette Perena v. Spouses Nicolas and Teresita L. Zarate, Philippine National Railways, and the Court of Appeals, G.R. No. 157917, August 29, 2012 it was held that loss of earning capacity may be granted even if the deceased passenger may only be an unemployed high school student at the time of the accident.  The basis of the computation of the earning capacity of the deceased was the minimum wage in effect at the time of his death, not reckoned from his age of 15 years at the time of death, but on 21 years, his age when he would have graduated from college.

When does a contract of carriage for goods start and end?  It commences from the time the goods are unconditionally placed in the possession of, and received by the carrier for transportation until the same shall have been delivered actually or constructively by the carrier to the consignee who has the right to receive them.  It remains in full force and effect even if they are temporarily offloaded or stored in transit unless the shipper or owner has made use of the right of stoppage in transit.  It continues even during the time they goods are stored in a warehouse of the carrier at the place of destination until the consignee has been advised of the arrival and has had a reasonable opportunity thereafter to remove or otherwise dispose of them. When does a contract of carriage for passengers start and end?  It commences the moment the person who purchases the ticket from the carrier presents himself at the proper place and in a proper manner to be transported. This is

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when the contract of carriage is perfected. The relationship will not terminate until the passenger has, after reaching his destination, safely alighted from the carrier’s conveyance or has had a reasonable opportunity to leave the carrier’s premises.  Such person must have a bona fide intention to use the facilities of the carrier, possess sufficient fare with which to pay for his passage, and present himself to the carrier for transportation in the place and manner provided. If he does not do so, he will not be considered a passenger and the carrier does not owe him extraordinary diligence. How are passenger baggages treated?  Passenger’s Baggage is deemed to include whatever articles a passenger usually takes with him for his own personal use, comfort and convenience according to the habits or wants of the particular class to which he belongs, either with reference to his immediate necessities or the ultimate purpose of his journey. Baggage may be hand-carried or checked-in or is delivered to the carrier.  Check-in baggage is treated as cargo, while hand-carried baggage is treated as necessary deposit. What is a bill of lading? • A bill of lading may be defined as a written acknowledgment of the receipt of goods and an agreement to transport and to deliver them at a specified place to a person named or on his order. It comprehends all methods of transportation. • Its three-fold character: (a) it is a contract in itself and the parties are bound by its terms (b) it is a receipt (c) it is a symbol of the goods covered by it

When does the responsibility of the carrier commence?  Commencement of the responsibility of the carrier is upon receipt of the merchandise from the shipper, either personally or through a person charged for that purpose, at the place indicated for their reception.  This responsibility shall endure and continue after the arrival of the goods at their destination until they are ready to be delivered at the usual place of delivery, and the owner or consignee has a reasonable opportunity, upon delivery, of examining them sufficiently to judge from their outward appearance their identity, whether they are in a proper condition, and to take them away. What is the period for delivery?  Where a period is fixed for delivery: the carrier must deliver the goods within the time fixed. If not, it shall pay the indemnity stipulated in the bill, neither the shipper nor the consignee being entitled to anything else. If not stipulated, it shall be liable for the damages that the delay may have caused.  Where no period was fixed: the carrier shall be bound to forward them in the first shipment of the same or similar goods which he makes to the point where he must deliver them. Should he not do so, the damages caused by the delay shall be for his account. When does conversion occur?  Where property in the hands of a carrier is not delivered within a reasonable time after it has reached its destination, the carrier in the absence of any legal exemption and after demand has been made and delivery refused, is liable for a conversion of the property.

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 The consignee may waive title to the property and sue for conversion He is entitled to the value of the goods at the time they should have been delivered to him. Subsequent tender of the goods by the carrier is not available as a defense.  If there has been demand and the carrier tenders the goods, the consignee cannot refuse the delivery. His sole remedy is an action for damages on account of the delay. There can only be conversion if there has been demand and the carrier refuses delivery. What are the options of the consignee in case of partial delivery?  If only part of the goods transported should be delivered, the consignee may refuse to receive them, when he proves that he cannot make use thereof without the others that were not delivered.  The determination of the usefulness of the goods individually depends upon the consignee, but he cannot be arbitrary and must justify his determination.

When can there be refusal to take delivery when goods are damaged?  If, on account of the damage, the goods are rendered useless for sale or consumption for the use for which they are properly destined, the consignee shall not be bound to receive them, and may leave them in the hands of the carrier, demanding payment of their value at the current market price that day.  If among the goods damaged there should be some in good condition and without any defect whatsoever, the foregoing provision shall be applicable with regard to the damaged ones, and

the consignee shall receive those which are sound, this separation being made by distinct and separate articles, no object being divided for the purpose, unless the consignee proves the impossibility of conveniently making use thereof in this form.

When can there be abandonment?  A right to abandon exists in cases of delay on account of the fault of the carrier as the consignee may leave the goods transported in the hands of the carrier, informing him thereof in writing before the arrival of the same at the point of the destination.  When this abandonment occurs, the carrier shall satisfy the total value of the goods, as if they had been lost or mislaid  Should the abandonment not occur, the indemnity for loss and damages on account of the delays cannot exceed the current price of the goods transported on the day and at the place where the delivery was to have been made. What is the period for claims?  The periods prescribed shall commence to run only from the time the consignee is in actual possession.  The 24-hour rule is counted from the receipt of goods except if: (a) the defect is due to the packing of the goods or may be seen from outside the goods, or (b) owner/shipper never received the goods as there can be no question as to the right to bring a claim.  When the period lapses or after the transportation charges have been paid, no claim whatsoever shall be admitted against the carrier with regard to the condition in which the goods transported were delivered. What is the limited liability rule in maritime law?

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•

The rule as based on the real and hypothecary nature of maritime law and its effect is that the vessel serves as the guarantee for the settlement for obligations under maritime contracts. Subject to certain exceptions, if the vessel is lost or is abandoned in favor of creditors, the obligations of the ship captain and the ship agent will be extinguished as their liability is limited to the res or the vessel.

What liabilities are extinguished?  The primary liabilities of the ship owner and ship agent which are extinguished are those which arise from: (a) acts of the captain (b) contracts entered into by the captain to repair, equip and provision the vessel, provided that the amount claimed was invested for the benefit of the vessel (c) indemnities in favor of third persons which arise from the conduct of the captain in the care of the goods or well as safety of the passengers, (d) damages to third persons for torts or quasidelict committed by the captain, except in a collision with another vessel (e) in case of collision due to the fault, negligence or want of skill of the captain, sailing mate or any member of the complement. What are the kinds of charter parties? • There are 2 kinds of charter parties: (a) contract of affreightment – involves the use of shipping space or vessels leased by the owner in part or as a whole, to carry goods for others. Here the vessel is still a common carrier (b)charter by demise or bareboat charter – the whole vessel is let to the charterer with a transfer to him of its entire command and possession and consequent control over its navigation,

including the master and the crew, who are his servants. The vessel in this case becomes a private carrier.

What is fortuitous collision? • The collision is fortuitous when the vessels collide with each other though fortuitous event or force majeure . • Each vessel and each cargo shall bear its own damages or a vessel which is properly anchored and moored may collide with those nearby by reason of a storm or other cause of force majeure , the vessel run into suffers its own damages What is a culpable collision?  The collision is culpable when the collision is due to the fault, negligence or lack of skill of the captain or the complement of the vessel, the owner of the vessel at fault shall be liable for the losses and damages or due to fault of both vessels, each vessel then suffers its own losses regardless of degree of fault, hence rules on contributory negligence does not apply, with regard to the owners of the cargo, both vessels shall be jointly and severally liable even if their cause of actions may be different or 2 vessels may collide with each other without their fault but by reason of the fault of a 3rd vessel, the owner of the 3 rd vessel will be liable. What is an inscrutable collision? • The collision is inscrutable where it cannot be determined which of the 2 vessels is at fault, each vessel then suffers its own losses and damages; both will be solidarily liable for losses and damages caused to their cargoes. When does COGSA apply?

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•

•

•

It applies to all contracts for the carriage of goods by sea to and from Philippine in foreign trade. Note that the transhipment of the cargo in the Philippines via a domestic inter-island vessel will not remove it from the application of COGSA A paramount clause will the allow the application of COGSA even if the transportation is domestic.

Will COGSA apply to an arrastre operator?  In the case of Insurance Company of North America v. Asian Terminals, Inc., G.R. No. 180784, February 15, 2012 it was noted that the term “carriage of goods” covers the period from the time when the goods are loaded to the time when they are discharged from the ship; thus, it can be inferred that the period of time when the goods have been discharged from the ship and given to the custody of the arrastre operator is not covered by the COGSA.  Thus, only the carrier and the ship may put up the defense of prescription if the action for damages is not brought within one year after the delivery of the goods or the date when the goods should have been delivered. On the other hand, it has also been held that not only the shipper, but also the consignee or legal holder of the bill may invoke the prescriptive period. However, the COGSA does not mention that an arrastre operator may invoke the prescriptive period of one year; Hence, it does not cover the arrastre operator. When must notice of damage be given under COGSA? • When damage is apparent, the notice of damage must be given immediately upon receipt of the goods.

•

•

When damage is not apparent, the notice must be given within 3 days from delivery. The prescriptive period of one year starts after the delivery of the goods or the date the goods should have been delivered.

What is the limit of liability under COGSA?  The maximum liability of the carrier is $500 per package or per customary freight unit, or its equivalent in other currency, unless the shipper or owner declares a greater value. The parties, however, may stipulate a lesser amount in the bill of lading and in no event will the carrier be liable for an amount more than the damage actually sustained.  Neither will the carrier nor the ship be liable in any event for loss or damage to or in connection with the transportation of the goods if the nature or value thereof has been knowingly and fraudulently misstated by the shipper in the bill of lading. What is the Warsaw Convention?  It applies to international air carriage or transportation.  The applicable categories: (a) That where the place of departure and place of destination are situated within the territories of two High Contracting Parties regardless of whether or not there be a break in transportation or transhipment, and (b) That where the place of departure and the place of destination are within the territory of a single High Contracting Party if there is an agreed stopping place within the territory subject to the sovereignty, mandate or authority of another power, even though the power is not party to the Convention. Where can an action be brought? • An action for a violation of a contract of international

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transportation by air must be brought, at the option of the plaintiff, in the territory of one of the High Contracting Parties, either before the court of domicile of the carrier or of his principal place of business or where he has a place of business through which the contract has been made, or before the court at the place of destination.

What are the limits of liability?  The carrier shall be liable for damages sustained in the event of death or bodily injury suffered by a passenger on board the aircraft or in the course of embarkation or disembarkation thereof, and of damage or loss of any checked baggage or any goods during the transportation by air.  The following are the limited liability of the carrier under the convention:(a) For each passenger – US $ 100,000.00; (b) For checked baggage and of goods – US $ 20.00 per kilogram; (c) For objects that the passenger takes charge himself – US $ 400.00 per passenger. The limitations may be increased by agreement, but any provision tending to relieve the carrier of its liability or to fix a lower limit shall be null and void.  Provided, that the limitations shall not apply if the damage is caused by the willful misconduct of the carrier or his agents.

LETTERS OF CREDIT What are letters of credit?  A letter of credit is basically an open letter of request whereby one person requests another to advance money or give credit to a third person for a certain amount and promises to repay the person advancing the money.  They are intended generally to facilitate the purchase and sale of goods by providing assurance to

the seller of prompt payment upon compliance with specified conditions or presentation of stipulated documents without the seller having to rely upon the solvency and good faith of the buyer.

Who are the parties to a letter of credit? • The basic parties to a letter of credit are: (a) The Buyer- he is the one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title (b) The Issuing Bank- is the bank from whom the letter of credit is procured and which undertakes to pay the seller upon receipt of the draft and proper documents of titles which are surrendered the buyer upon reimbursement, and (c) The seller- who in compliance with the contract of sale ships the goods to the buyer and deliver the documents of title and draft to the issuing bank to recover payment. • The three contracts • The contract of sale • The application and agreement to issue the letter of credit • The letter of credit • These contracts must be maintained in a state of perpetual separation What is the participation of a confirming and advising bank?  The Advising Bank – is the bank in the country of the beneficiary which communicates to the beneficiary the notice of the credit issued by the issuing bank  The Confirming Bank- is the bank that undertakes that the letter of credit will be fully paid.  Usually the confirming bank is also the advising bank, otherwise it is utilized to lend credence to the letter of credit issued by a lesser known issuing bank and is directly liable to the beneficiary.

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What is the independence principle?  The independence principle in a letter of credit transaction means that a bank, in determining compliance with the terms of a letter of credit is required to examine only the shipping documents presented by the seller and is precluded from determining whether the main contract is actually accomplished or not. This arrangement assures the seller of prompt payment, independent of any breach of the main sales contract

What is the strict compliance rule? • The strict compliance rule in a letter of credit transaction means that the documents tendered by the seller or beneficiary must strictly conform to the terms of the letter of credit, i.e., they must include all documents required by the letter of credit.

letter of credit even if the obligor is under a corporate rehabilitation stay order because the prohibition under the rules is on the enforcement of claims against the debtor, guarantors or sureties of the debtor whose obligations are not solidary with the debtor.

What is the effect of payment on an expired letter of credit? • In the case of Rodzssen Company Inc. v. Far East Bank and Trust Company, 357 SCRA 618 it was held that an issuing bank which paid the beneficiary of an expired letter of credit can recover payment from the applicant who obtained the goods from the beneficiary to prevent unjust enrichment.

TRUST RECEIPTS What is the fraud exception? • The fraud exception maintains that despite the bank’s unconditional obligation to pay the seller upon presentation of the required documents, the issuing bank is not bound to pay when there has been fraud by the seller. The test is whether, standing in the shoes of the paying bank at the time of payment, the fraud was clear and obvious. If [the] fraud was clear and obvious, the bank pays the beneficiary at its own peril and it is not entitled to reimbursement. But if [the] fraud is not clear and obvious, then it is not for a bank to question why the parties involved had chosen to conduct their business in any particular way. What is the effect of a stay order on beneficiary? • In the case of MWSS v. Hon. Daway, 432 SCRA 599, it was held that the beneficiary of a stand-by letter of credit can draw on the

What is a trust receipt transaction? • A trust receipt transaction is a transaction between parties known as an entruster and an entrustee whereby the entruster, who owns or hold 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 trust receipt wherein the entrustee binds himself to hold the specified goods, documents or instruments in trust for the entruster and 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 the goods, documents or instruments themselves if they are unsold or not otherwise disposed of. What are the two basic obligations?

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 There are two basic obligations that define a trust receipt transaction. The first is covered by a provision that refers to money under the obligation to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the provision referring to the merchandise received under the obligation to return it (devolvera) to the owner.  Thus, under the Trust Receipts Law, intent to defraud is presumed when (1) the entrustee fails to turn over the proceeds of the sale of the goods covered by the trust receipt; or (2) when the entrustee fails to return the goods under trust, if they are not disposed of in accordance with the terms of the trust receipt. What is the effect of the absence of an obligation?  In the case of Land Bank of the Philippines v. Lamberto C. Perez, et.al., G.R. No. 166884, 672 SCRA 117, June 13, 2012, in all trust receipt transactions, both obligations on the part of the (en)trustee exist in the alternative- the return of the proceeds of the sale or the return or recovery of the goods, whether raw or processed. When both parties enter into an agreement knowing that the return of the goods subject of the trust receipt is not possible even without any fault on the part of the trustee, it is not a trust receipt transaction; the only obligation actually agreed upon by the parties would be the return of the proceeds of the sale transaction. This transaction becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the purchase of the goods. What are the loan and security features of a trust receipt?  The loan feature of a trust receipt transaction lies in the manner it

facilitates the importation or purchase of merchandise by the extension of credit.  The security feature of a trust receipt lies in the fact that the imported or purchased merchandise will serve as collateral for the credit extended and that the obligation of the entrustee is to deliver the proceeds of their sale or return them if not sold.

What is meant by “security interest”?  A Security Interest means a property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only. What are some of the principal obligations of the entrustee ? • To hold the goods in trust for the entruster and to dispose of them strictly in accordance with the terms of the trust receipt; • To receive the proceeds of the sale of the goods in trust for the entruster and to turn over the same to the entruster to the extent of the amount owing to the entruster; • To insure the goods for their total value against loss from fire, theft, pilferage or other casualties; • To return the goods to the entruster in case they could not be sold or upon demand of the entruster. • AMLA What is money laundering? • Money Laundering is the process by which a person conceals the existence of unlawfully obtained money and makes it appear to have originated from lawful sources.

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•

There are offenses.

now

34

predicate

Can there be simultaneous prosecutions for laundering and the predicate offense? • It is now provided that any person may be charged with and convicted of both the offense of money laundering and the unlawful activity and that the prosecution for money laundering shall proceed independently of the proceeding relating to the unlawful activity. How is money laundering committed? • The offense of money laundering may be committed by any person 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) Attempting to or conspiring to commit money laundering offenses. (e)Aiding, abetting, assisting in or counsels the commission of money laundering, and (f) Performs or fails to perform any act as a result of which he facilitates the offense of money laundering. • It is also committed by 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. Who is a covered person? A Covered Person, natural or juridical, refers to:

 Banks, Non-Banks, Quasi-Banks, Trust Entities, and all other institutions and their subsidiaries and affiliates supervised by the BSP  Insurance Companies, Pre-Need Companies and all other institutions supervised by the Insurance Commission  Security Dealers, brokers, salesmen, investment houses and other similar entities managing securities or rendering services as an investment agent, advisor, or consultant, Mutual funds, closed end investment companies, common trust funds, and other similar persons, and ) 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 SEC

Who are other covered persons? • Jewelry dealers in precious stones, who, as a business, trade in precious metals, for transactions in excess of One Million Pesos (PHP 1,000,000.00)  Company service providers which, as a business, provide any of the following services to third parties: (a) acting as a formation agent of juridical persons, (b) acting or arranging for another person to act as a director, corporate secretary of a company, a partner of a partnership or similar position in relation to other juridical persons, (c) providing a registered office, business address or accommodation, correspondence or administrative address for a company, partnership or other legal person or arrangement, and (d) acting as or arranging for another person to act as nominee shareholder for another person  Persons who provide the following services: (a) managing client

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money, securities or other assets, (b) management of bank, savings and securities accounts, (c) organization of contributions for the creation, operation and management of companies, and (d) creation, operation or management of juridical persons or arrangements, and buying and selling business entities.

•

Who are excluded from covered persons? • The term “covered person” shall exclude lawyers and accountants acting as independent professionals in relation to information concerning their clients or where disclosure of information would compromise client confidences or the attorneyclient relationship: Provided that these lawyers and accountants are authorized to practice in the Philippines and shall be subject to their respective codes of conduct and/or professional responsibility. How is the law implemented? • Establish and record, and maintain a system of verifying, the true identifies of clients, including the legal existence and organizational structure of a corporate client, and their representatives, based on official documents. • Keeping the records for five (5) years. • Requiring the report covered transactions and suspicious transactions to AMLC, within five (5) working days from occurrence. What is a covered transaction? • A covered transaction is a transaction in cash or other equivalent monetary instrument involving a total amount in excess of Five Hundred Thousand Pesos (PHP500,000.00) within one (1) banking day. What is a suspicious transaction?

It is a transaction with a covered institution, regardless of the amounts involved, where any of the following circumstances exist: (a)There is no underlying legal or trade obligation, purpose or economic justification; (b)The client is not properly identified; (c) The amount involved is not commensurate with the business or financial capacity of the client; (d)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; (e)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; (f)The transaction is in any way related to an unlawful activity or offense under this Act that is about to be, is being or has been committed; or (g) Any similar or analogous transaction.

What rules apply to the freezing of accounts? • The freezing of a monetary instrument or property is upon a verified petition by the AMLC to the CA after a determination that probable cause exists that it is related to an unlawful activity. • This issues immediately and will be valid for a period not exceeding 6 months depending on the circumstances of the case. Provided that if there is no case filed against a person whose account has been frozen, the freeze order shall be deemed ipso facto lifted. • The remedy is a motion to lift a freeze order which should be resolved before the freeze order expires. No TRO or injunction shall issue against a freeze order unless issued by the Supreme Court

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INTELLECTUAL PROPERTY Is IP protection interchangeable? • In the case of Pearl & Dean Phils. Inc. v. Shoemart, Inc., 409 SCRA 231 it was held that copyrights, trademarks and patents are completely distinct and separate from one another and the protection afforded by one cannot be used interchangeably to cover items or works that exclusively pertain to the others. What is entitled to IP protection, the idea or the expression? • Ideas are not entitled to copyright protection, what is entitled to protection is the expression of the idea. • This means that the copyright does not preclude others: (a) from using information revealed in the author’s work, like following the instructions in a recipe book, or (b) creating works based on the same underlying idea, like a comic book with a talking mouse as the central character. What is the No Formality Rule?  While the Intellectual Property Code does not explicitly provide for the rule, we follow the mandate of Article 5 (2) of the Berne Convention which provides that: “The enjoyment and the exercise of these rights shall not be subject to any formality.”  A formality is any condition on which the existence or exercise of the right depends. While registration, fees and deposit of copies are formalities, they will be considered as such only when the existence of the copyright or exercise of attendant rights depends on compliance.

What is the effect of an internet posting of material? • When literary or artistic material is posted on the internet, it is considered publicly disseminated. Regardless of whether it has been accessed or not, it must be registered within 3 weeks from posting to establish the exclusive right of the creator. • The use of the phrase “ all rights reserved” would not be sufficient to establish the copyright as this per se emanates from the certification issued by the National Library. What is the effect of the photocopying of books? • The photocopying of books and similar materials by students for their use would not constitute fair use as it deprives the author of his exclusive right to reproduce copies of his work. This also deprives him of the royalty or any other compensation legally due. What is Conceptual Separability?  The issue of conceptual separability arises when an article of applied art with a utilitarian aspect can be given copyright protection.  It is resolved by determining whether the artistic element is separable from its utilitarian function.  The Denicola Test has been adopted in this jurisdiction. It provides: “ If the design elements reflect a merger of aesthetic and functional considerations, the artistic aspects cannot be said to be conceptually separable from its utilitarian aspects. Conversely, where the design elements can be identified as reflecting the designer’s artistic judgment exercised independently of functional influence, there is conceptual separability. What is Fair Use?

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 Is a privilege granted enjoyed by one other than the owner of the copyright to use the copyrighted material in a reasonable manner without his consent, notwithstanding the monopoly of the owner of the copyright.  It may include criticism, comment, news reporting and teaching, including making of copies for classroom use, scholarship and research.  Acknowledgment would not make an otherwise infringement into fair use. When is an invention patentable? • Patentable inventions refer to any technical solution of a problem in any field of human activity which is novel or new, involves an inventive step and is industrially applicable. • Thus the elements of patentability are: (a) novelty; (b) an inventive step; and (c) industrial applicability. • The patent duration is 20 years from the date of the filing of the application without renewal.

What is an 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 forms gives a special appearance to and can serve as pattern for an industrial product or handicraft. This is purely ornamental or aesthetic in nature as opposed to useful or functional.  If it is an industrial design, the patent duration is 5 years from the filing date of the application, renewable for not more than 2 consecutive periods of 5 years each. What is a Utility Model?  A utility model is a technical solution to a problem in any field

of human activity which is new and industrially applicable. It may be or may relate to, a product, of process, or an improvement.  Essentially, a utility model refers to an invention in the mechanical field that has some type of usefulness.  If it is utility model, the patent duration is 7 years from date of the filing of the application without renewal.

Who owns the patent?  The right to a patent belongs to the inventor, his heirs, or assigns. When two or more persons have jointly made an invention, the right to a patent shall belong to them jointly.  Where the invention is made pursuant to a commission, the person who commissions it shall be the owner of the patent, unless there is an agreement to the contrary.  When the invention is made by an employee in the course of his employment, it shall belong to the: The employee, if the inventive activity is not part of his regular duties even if he utilizes the time, facilities and resources of the employer.The employer, if the invention is a result of the performance of regularly assigned duties, unless there is an agreement, express or implied, to the contrary. What is the First to File Rule?  The first to file rule mandates that if two or more persons have made the invention separately and independently of each other the right to the patent shall belong to the person who first filed an application for such invention.  The law provides for safeguards to protect the inventor prejudiced by the first to file rule. These are: (a) a person deprived of a patent without his consent or through fraud may be declared by a court

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to be the true and actual inventor, and (b) a prior user in good faith shall have the right to continue using the invention in the territory where the patent produces its effects.

What is the effect of prior user on a patent?  A 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 or priority date of the application for which a patent was granted, shall have the right to continue use thereof within the territory where the patent produces effect.  As a protection for the patent holder, a prior user cannot transfer or assign this right unless in connection with the transfer or assignment of his entire enterprise or business. What is the Doctrine of Equivalents?  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, performs substantially the same function in substantially the same way to achieve substantially the same result. In other words, 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. What is a well known mark?  A mark or a trade name cannot be registered if it is identical with, or confusingly similar to, or constitutes a translation of a mark

which is considered by competent authority to be well known internationally and in the Philippines, whether registered or not, as being already the mark of a person other than the applicant, and used for identical or similar goods or services.  If registered in the Philippines, protection will extend to goods or services which are not similar to those with respect to which registration is applied for, if it would indicate a connection between them and the interest of the owner of the mark is likely to be damaged.

What distinguishes an infringement from unfair competition? • Infringement is unauthorized use of a trademark, whereas unfair competition is the passing off of one’s goods as those of another. • In infringement, fraudulent intent is unnecessary, whereas in unfair competition, fraudulent intent is essential. • In infringement, prior registration is a prerequisite to an action, whereas in unfair competition, registration is not necessary. What are the Dominancy and Holistic tests?  The dominancy test focuses on the similarity of the prevalent features of the competing marks. If the competing marks contain the main or essential or dominant features of the other and confusion is likely to result, an infringement takes place. This test relies on a visual comparison between the competing marks.  The Holistic test is based not only on a visual comparison, but also aural, connotative and overall impressions engendered by the trademarks in the marketplace to determine confusing similarity. What is the distinction between related and non-related goods?

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 Where the trademarks involved are identical or closely similar and the goods on which they are affixed are identical, there can be no question that an infringement exists in favor of the owner of the registered mark against the junior user.  If non-related, the following criteria must be utilized: (a) prior mark is well known internationally and in the Philippines; (b) registration would suggest a connection between the nonrelated goods; and (c) the interest of the owner of the well-known mark is likely to be damaged or precluded from expanding into the area of goods for which registration is sought.

WAREHOUSE RECEIPTS When are the goods deliverable? • In the absence of any lawful excuse, he is bound to deliver the goods upon a demand by: (a) holder of a receipt for the goods, or (b) by the depositor, provided that the demand be accompanied by an (a) an offer to satisfy the warehouseman’s lien (b) an offer to surrender the receipt if it is negotiable, and (c) a readiness and willingness to sign acknowledgment of delivery of the goods if requested by the warehouseman To whom is delivery made?  A warehouseman is obliged to deliver goods to: (a) person lawfully entitled to it such as: person determined by the court to be entitled to it in an interpleader case, or a person who purchases the goods at an auction to satisfy a warehouseman’s lien or because the goods are hazardous or of a perishable nature (b) the person who is himself entitled to delivery by the terms of the receipt. If receipt is non-negotiable, delivery

will be to the person entitled to it under its terms or by written authority clearly indicated therein or another document. If receipt is negotiable, to the person named or the last indorsee.

When can delivery be refused? • A warehouseman may thus legally refuse to deliver goods covered by a warehouse receipt under the following instances: (a) When the demand is not accompanied by the three requirements provided in Section 8 (b)When he has a lien valid against the person demanding the goods, he can refuse to deliver the goods until the lien is satisfied and, (c) In cases when there are several adverse claimants to the title or possession of the goods. What is a misdelivery? • A misdelivery or conversion occurs when (a) delivery is made to one not lawfully entitled to it, or (b) even if delivery is made to a person holding a non-negotiable or negotiable receipt, if prior to delivery, he had either been requested not to make delivery by the person lawfully entitled to a right of property or possession in the goods or had information that delivery about to be made was to one not lawfully entitled to possession of the goods. What is the warehouseman’s lien?  The warehouseman’s lien refers to the lien of that a warehouseman has on the goods deposited with him or on the proceeds thereof in his hands for all lawful charges for storage and preservation of the goods, money advanced by him in relation to such goods such as the expenses of transportation or labor, or other related expenses.  The lien may be enforced against all goods belonging to the person liable for the charges, as well as against all goods belonging to the

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others deposited by the person liable for the charges who has been entrusted with the possession of the goods and could have validly pledged the same.  The lien can be lost if a warehouseman surrenders possession of the goods, or by refusing to deliver the goods when a demand is made with which he is bound to comply under the provisions of the Act

BANKING LAWS What is an open market operation? • In the case of Bank of Commerce v. Planters Development Bank, 681 SCRA 521, “open market operations” has been defined as the act of the Bangko Sentral ng Pilipinas in publicly buying or selling government securities from (or to) banks and financial institutions. • The purpose is to regulate the supply of money in the economy to influence the timing, cost and availability of money and credit. When does conservatorship occur?  Conservatorship takes place whenever a bank or quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors.  It is an attempt to save the bank from bankruptcy and ultimate liquidation. It is helping the bank by introducing effective management reforms and/or the infusion of capital.  A conservator may take over a bank or quasi-bank without the need of first declaring the bank insolvent nor is the designation of a conservator a precondition to the designation of a receiver.  The period is 1 year. When does receivership occur?

 Receivership is defined as the summary closure of a bank without prior notice and hearing after a finding that the continuance in business will involve probable loss to its depositors and creditors.  Prior notice and hearing is not required before placement of a bank under receivership.  The bank as a corporation is not deemed dissolved by a receivership nor does it interfere with the exercise of corporate rights. It retains its corporate personality and can sue and be sued, but in any case suit is to be initiated and prosecuted through the liquidator.

How are banks distinguished from quasi-banks?  Quasi-banks are 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 of receivables and other obligations.  Deposit substitutes is an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments from the borrower’s own account, for the purpose of relending or purchasing receivables, and other obligations.  The distinction is that they do not accept deposits. What is the nature of deposits?  As to nature, all kinds of deposits whether fixed or current are to be treated as loans and are to be covered by the law on loan.  They are also considered in the nature of irregular deposits as they are really loans because they earn interest. Considering a deposit involves the delivery of a thing for safekeeping with the obligation to return the very same

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thing upon demand and a loan is a contract whereby one of the parties delivers to another money or other consumable thing upon the condition that the same amount of the same kind and quality shall be paid.

What degree of diligence is required of a bank?  A bank should exercise its functions and treat the accounts of their clients not only with the diligence of a good father of a family but it should do so with the highest degree of care considering the fiduciary nature of their relationships with their depositors.  The depositor expects the bank to treat his account with utmost fidelity, whether such account consists only of a few hundred pesos or millions. This is especially true since the bank is engaged in business impressed with public interest and it is its duty to protect in return many clients, and depositors who transact business with it.  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. What is the Ratio of Net Worth to Total Risk Assets?  Is the minimum ratio prescribed by the Monetary Board which the net worth of a bank must bear to its total risk assets which can include contingent accounts.  This measures capital adequacy as operations require that an increase in liability should be accompanied by an increase in retained earnings.  Non compliance with the ratio may compel the Monetary Board to: (a) prohibit or limit distribution of profits (b) require all or part of net profits be used to increase capital, or (c) restrict the acquisition and making of new investments.

What is the Single Borrower Limit Rule?  Single Borrower Limit Rule regulates the total amount of loans, credit accommodations and guarantees that may be extended by a bank to any person, partnership, association, corporation or other entity.  The rule seeks to protect a bank from making excessive loans to a single borrower by prohibiting it from lending beyond a specified ceiling. The current limit is 25% of the net worth of the bank concerned.  The ceiling is subject to possible increase by an additional 10% provided the additional liabilities of any borrower are adequately secured by trust receipts, shipping documents, warehouse receipts or other similar documents transferring or securing title covering readily marketable, nonperishable goods which must be fully covered by insurance. What is the DOSRI Rule? • DOSRI Rules are rules promulgated by the BSP which regulate the amount of credit accommodations that a bank may extend to its directors, officers, stockholders and their related interests, thus the term, DOSRI. • Generally, a bank’s credit accommodations to its DOSRI must be in the regular course of business and on terms not less favorable to the bank than those offered to non-DOSRI borrowers. This is the “arms-length” rule. What are the DOSRI Transaction Rules?  A bank may allow a DOSRI to: (a) borrow from the bank; (b) become a guarantor, indorser or surety for loans from such bank to others; (c) be an obligor; or (d) incur any contractual liability with the written approval of the majority of

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all the directors of the bank, excluding the director concerned.  The DOSRI borrower is required to waive the secrecy of his/her deposits of whatever nature in all banks in the Philippines and the ceiling/limitation as to loans are followed.  The amount of the borrowing is limited to the amount equivalent to their unencumbered deposits and book value of their paid in capital contribution, unless they are: (a) secured by assets considered by the Monetary Board as non risk (b) under a fringe benefit plan approved by the BSP, or is (c) extended by a cooperative bank to its cooperative stockholders.

SECRECY OF BANK DEPOSITS What are the prohibited acts?  The examination or inquiry or looking into all deposits of whatever nature with banks or banking institutions in the Philippines, including investment in bonds issued by the government or its political subdivisions and instrumentalities by any person, government official, bureau or office.  The disclosure by any official or employee of any banking institution to any unauthorized person of any information concerning said deposit. What are the covered deposits?  All deposits of whatever nature with banks or banking institutions found in the Philippines; or  Investments in bonds issued by the Philippine government, its political subdivisions and instrumentalities.  While the term “deposit” ordinarily pertains to an account which gives rise to a creditor-debtor relationship, the law is intended to

cover money deposited which may be used by a bank for authorized loans to third persons regardless of whether it creates a creditordebtor relationship such as trust funds.

What are the FCDU equity exceptions?  In the case of Salvacion v. Central Bank, GR No. 94723, August 18, 1997 the Supreme Court recognized that the demands of justice correct a wrong committed to a girl of tender years were above the need for the foreign offender's dollars, allowing the looking into, and in fact garnishing the foreign currency deposit of the transient foreigner, to enforce payment of the indemnity due.  In the case of China Banking Corp. v. Court of Appeals, GR No. 140487, December 18, 2006 the Supreme Court allowed an inquiry into a foreign currency deposit to settle the real ownership of the funds. Though pro hac vice or this one particular reason, the ruling was clear that the "allowance of the inquiry would be in accord with the rudiments of fair play and the upholding of fairness in our judicial system."

PHILIPPINE DEPOSIT CORPORATION

INSURANCE

What is an insured deposit?  Refers to the net amount due to any bonafide depositor for legitimate deposits in an insured bank net of any obligation of the depositor to the insured bank as of the date of the closure and includes foreign currency denominated deposits, but not to exceed PHP 500,000.00.  An amount in excess of the insured deposit can be claimed upon final liquidation of the

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remaining assets of the closed bank but payment will depend on available assets to settle preferred claims and approval of the liquidation court. What is splitting of deposits? • Occurs whenever a deposit account with an outstanding balance of more than the statutory maximum amount of insured deposit maintained under the name of a natural or juridical entity is broken down and transferred into 2 or more accounts under different names within 120 days immediately preceding a closure order for purposes of availing of maximum deposit insurance coverage.

Philippines and duly registered with the Central Bank which shall assess and appraise the value of such assets other than foreign exchange.  It can be put in: (a) An export enterprise which is an enterprise wherein a manufacturer, processor or service (including tourism) enterprise exports sixty percent (60%) or more of its output, or wherein a trader purchase products domestically and exports sixty percent (60%) or more of such purchases, or (b) A domestic market enterprise which is an enterprise which produces goods for sale, or renders services to the domestic market entirely or if exporting a portion of its output fails to consistency export at least 60% thereof.

TRUTH IN LENDING ACT What are the purposes of the law? • Protect a debtor from misrepresentation or concealment. • Permit the debtor to fully appreciate and evaluate the real cost of his borrowings. • Avoid the circumvention of usury laws. What transactions are not covered? • Those which do not involve the payment of any finance charge by the debtor. • Those which the debtor is the one specifying a definite and fixed set of credit terms.

FOREIGN INVESTMENTS ACT What is a foreign investment?  A foreign investment is an equity investment made by nonPhilippine national in the form of foreign exchange and/or other assets actually transferred to the

What are the general investment rules?  Any non-Philippine national or entity may do business in the Philippines up to 100% of its capital provided: (a) It is doing business as a domestic market enterprise outside the Negative List (b) It is doing business as an export enterprise whose products or services do not fall within Negative Lists A and B, except for defense-related activities, which may be approved or authorized, and (c) Provided further that, as required by existing laws, the country or state of the applicant must allow Filipino citizens and corporations to do business therein. What qualifies the investment?  If the activity is in the Negative Lists, foreign ownership in the enterprise is generally limited to a maximum 40% unless the Constitution or other laws provide a lower limit.  The domestic market enterprise can later change its status to an export enterprise if over a 3 year

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period it has consistently exported 60% or more of its output.  This ownership limitation for activities in the Negative List can be waived should the foreign investor decide to invest in an enterprise that exports at least 60% or more of its output. In this case, foreign ownership may reach 100%. However, the waiver on limitation of foreign ownership will not apply where the economic activity is one for which the Constitution or other laws provide

for an absolute and definite limit on foreign ownership.  If it decides to enter an Export Enterprise: As a general rule, there are no restrictions on the extent of foreign ownership (up to 100%) in export enterprises, unless the products and services fall within Negative Lists A and B or utilize raw materials from depleting natural resources.

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