Commercial Law Notes (Atty. Rondez)

UNIVERSITY OF THE CORDILLERAS BAR OPERATIONS 2011 Commercial law Prepared by:

ATTY. RENATO S. RONDEZ

NEGOTIABLE INSTRUMENTS LAW (Act No. 2031, June 2, 1911) Written contracts for the payment of money; by its form, intended as a substitute for money and intended to pass from hand to hand, to give the holder in due course the right to hold the same and collect the sum due. Negotiable instruments produce the effect of payment only when they have been encashed or through the fault of the creditor have been impaired. (Article 1249, NCC) Principal Features and Characteristics a. negotiability - right of transferee to hold the instrument and collect the sum due b. accumulation of secondary contracts - instrument is negotiated from person to person Requisites of Negotiability An instrument to be negotiable must conform to the following requirements: a. It must be in writing and signed by maker or drawer;

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b. Must contain an unconditional promise or order to pay a sum certain in money; c. Must be payable on demand, or at a fixed or determinable future time; d. Must be payable to the order or to bearer; and e. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. *For a Promissory Note to be negotiable, requisites a,b,c and, d must be met. *For a bill of exchange to be negotiable, all the above requisites must be met. Purpose of Negotiability. To allow bills and notes the effect which money, in the form of government bills or notes, supplies in the commercial world. The validity and negotiable character of a negotiable instrument are NOT affected by the fact that: 1. It is not dated; 2. It does not specify the place where it is drawn or where it is payable; 3. It bears a seal;

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GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

4. It designates a particular kind of current money in which payment is to be made (Sec. 6) Kinds of Instruments:

Negotiable

A. PROMISSORY NOTE unconditional promise to pay in writing made by one person to another, signed by the maker, engaging to pay on demand or a fixed determinable future time a sum certain in money to order or bearer. When the note is drawn to maker’s own order, it is not complete until indorse by him. (Sec. 184 NIL) Parties: a. Maker – one who makes a promise and sign the instrument b. Payee – one to whom the promise is made or the instrument is payable. FORMS OF PROMISSORY NOTE 1. Due bill, an instrument whereby one person acknowledges his indebtedness to another and promises to pay a sum certain in money. 2. Bonds, which are in the nature of PN. 3. Certificate of Deposit issued by banks payable to depositor or his order, or to bearer BAR OPERATIONS 2011

B.

BILL OF EXCHANGE unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126 NIL) Parties: a. Drawer – one who gives the order to pay money to third party. b. Payee – one to whom the bill is drawn or is payable c. Drawee/ acceptor – person to whom the bill is addressed and who is ordered to pay. Forms of bill of exchange: 1. Trade Acceptance, A BOE drawn by seller on the buyer for the purchase price of goods. 2. Clean Bill of Exchange, A BOE wherein no document is attached upon presentment for acceptance or payment. 3. Documentary Bill of Exchange, A BOE wherein documents are attached upon presentment for acceptance or payment. 4. Bank Acceptance- A draft drawn and accepted by a bank.

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5. Drafts, which are BOE drawn by one bank upon another. C. CHECK - bill of exchange drawn on a bank and payable on demand. (Sec. 185 NIL) FORMS OF CHECK 1. Ordinary Check 2. Cashier’s Check, A Check payable to third person which is drawn by the bank upon itself. (2003 BEQ) 3. Certified check , A personal check with guaranteed funds to cover the payment of the check. 4. Voucher Check 5. Traveler’s Check 6. Manager’s Check , A check drawn by the manager of the bank. (2003 BEQ) 7. Crossed Check ( 2004, 2005 BEQ) 8. Memorandum Check. Other forms of negotiable instruments: a. Certificate of deposit issued by banks, payable to the depositor or his order, or to bearer (CALTEX v. CA, 212 SCRA 471) b. Trade Acceptance; c. Bonds, which are in the nature of a promissory notes; d. Drafts which are bills of exchange drawn by one bank upon another; •All of these comply with Sec. 1 NIL. BAR OPERATIONS 2011

•Letters of Credit are not negotiable. DISTINCTIONS: (2005 BEQ) Negotiable Instruments

Nonnegotiable Instruments

Does not Contains all the contain all the requisites of requisites of Sec. 1 of the Sec. 1 of the NIL NIL Transferred by Transferred by negotiation assignment Holder in due Transferee course may acquires rights have better only of his rights than transferor transferor Prior parties Prior parties merely warrant warrant payment legality of title Transferee has right of Transferee has recourse no right of against recourse intermediate parties Negotiable Instruments

Negotiable Documents of Title Does not Have requisites contain of Sec. 1 of the requisites of NIL Sec. 1 of NIL Page 3

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Have right of recourse against intermediate parties who are secondarily liable Holder in due course may have rights better than transferor Subject is money Instrument itself property value

No secondary liability of intermediate parties

Transferee merely steps into the shoes of the transferor Subject is goods Instrument is merely evidence of is title; thing of of value are the goods mentioned in the document

Promissory Note Unconditional promise Involves 2 parties Maker primarily liable

Bill of Exchange

Unconditional order Involves 3 parties Drawer only secondarily liable Only 1 Generally 2 presentment - presentments for payment for acceptance and for payment

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Check Always drawn upon a bank or banker Always payable on demand

BOE - May or may not be drawn against a bank

- May be payable on demand or at a fixed or determinable future time Not - Necessary that it be necessary presented for that it be acceptance presented for acceptance - Drawn on - Not drawn on a a deposit deposit - The death - The death of the of a drawer drawer of the of a check, ordinary bill of with exchange does not knowledge by the banks, revokes the authority of the banker pay - Must be - May be presented presented for payment within a for reasonable time payment after its last within a negotiation. reasonable time after its issue (6 months) PN CHECK - There are two - There are three Page 4

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(2) parties, the (3) parties, the maker and the drawer, the payee drawee bank and the payee - May be drawn - Always drawn against any against a bank person, not necessarily a bank - May be payable -Always payable on demand or at on demand a fixed or determinable future time - A promise to - An order to pay pay *Note: PN, BOE and Checkdefinitions (2002 BEQ) However, these instruments are non-negotiable: 1. Treasury warrant are nonnegotiable because there is an indication of the fund as the source of payment of the disbursement.(Metrobank v. CA, 194 SCRA 169) 2. Since a postal money order is subject to restrictions and limitations under postal laws and issued by the Government which is not engaged in commercial transactions, it is not governed by NIL. (Phil. Educ. Co., Inc. vs. Soriano, 39 SCRA 587) 3. Letters of credit 4. Warehouse receipts - NonNegotiable for the same as Bill of lading it merely represents goods, not money. BAR OPERATIONS 2011

Factors that affect the determination of negotiability of instruments: a. Whole instrument; b. What appears on the face of the instrument; c. Requisites enumerated in Sec.1 of NIL; and d. Should contain words or terms of negotiability. (Gopenco, Commercial law Bar Reviewer, cited in Aquino p. 23)  In determining the negotiability of an instrument, the instrument in its entirety and what appears on its face must be considered. It must comply with the requirements of Sec.1 of NIL. ( Caltex Phils. V. CA, 212 SCRA 448)  The acceptance of a bill of exchange is not important in the determination of its negotiability. The nature of acceptance is important only on the determination of the kind of liabilities of the parties involved. (PBCOM v. Aruego, 102 SCRA 530) Notes on Section 1: - In order to be negotiable, there must be a writing of some kind, else there would be nothing to be negotiated or passed from hand to hand. The writing may be in Page 5

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-

-

-

-

ink, print or pencil. It may be upon parchment, cloth, leather or any other substitute of paper. It must be signed by the maker or drawer. It may consist of mere initials or even numbers, but the holder must prove that what is written is intended as a signature of the person sought to be charged. The Bill must contain an order, something more than the mere asking of a favor. Sum payable must be in money only. It cannot be made payable in goods, wares, or merchandise or in property. A drawee’s name may be filled in under Section 14 of the NIL.

MEANING OF REQUISITES:

PARTICULAR

a. UNCONDITIONAL PROMISE OR ORDER - Where the promise or order is made to depend on a contingent event, it is conditional, and makes the instrument nonnegotiable. The conditional nature of the promise or order is not effected by: a. An indication of a particular fund from which the acceptor reimburses himself after paying the holder; BAR OPERATIONS 2011

b. A statement of the transaction which gives rise to the instrument. b. CERTAINTY OF SUM - The sum is certain if the amount fixed. - The certainty is HOWEVER NOT affected although to be paid: 1. with interests; 2. by stated installments; 3. by stated installments with acceleration clause; 4. with exchange; 5. with cost of collection or attorney’s fees. Escalation Clause – an agreement pertaining to a loan or increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board. De-escalation Clause – an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be reduced in the event that the applicable maximum rate of interest is decreased by law or by the Monetary Board. The presence of escalation clause or a escalation clause or both in instrument does not affect negotiable character of instrument.

an dethe the the

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Acceleration clause - it is a provision that upon default in payment of any installment or of interest, the whole shall become due. c. PAYABLE IN MONEY  General Rule: If some other act besides payment of money is promised or ordered, the instrument becomes nonnegotiable.  Exceptions: a. Authorizes the sale of collateral securities on default; b. Authorizes confession of judgment on default; c. Waives the benefit of law intended to protect the debtor; d. Allows the creditor the option to require something to be done in lieu of money. d. PAYABLE ON DEMAND An instrument is payable on demand: a. Where it is expressed to be payable on demand, at sight or on presentation; b. Where no period of payment is stated; c. Where the instrument has been issued, accepted or indorsed after maturity. e. DETERMINABLE FUTURE TIME - Future time is determinable in the following cases: BAR OPERATIONS 2011

a. At a fixed period after date or sight; b. On or before a specified fixed or determinable future time; c. On or at a fixed period after the occurrence of a specified event, certain to happen, although the exact date is not certain. f. PAYABLE TO ORDER - The instrument is payable to order where drawn payable to the order of a specified person, or to him or his order. - The payee must be named or otherwise indicated therein with reasonable certainty. g. PAYABLE TO BEARER a. Where it is expressed to be so payable; b. When payable to a person named therein or bearer; c. When payable to the order of a fictitious or non-existing person, and such fact was known to the drawer or maker; d. When the name of the payee is not the name of a person; e. When the only and last indorsement is an indorsement in blank.  An original bearer instrument remains to be a bearer instrument even if indorsed specially and thus can be negotiated by mere delivery. Page 7

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 When the payee is vaguely designated, the loss will be borne by the party who caused it – the drawer. (Equitable Bank v. IAC, 161 SCRA 518). RULES AS TO DATES There are several important principles as to dates in negotiable instruments. These are: 1. Where the instrument, its acceptance, or indorsement is dated, such date is presumed to be the corresponding true date; Date is important 2. Where the instrument is payable within a specified period after date, or after acceptance, in which case the date of the instrument and the date of maturity of the instrument; in these cases, the holder may insert the true date; a. when the instrument is payable on demand, the date is necessary to determine whether the instrument was presented within a reasonable time from issue in the case of notes or from last negotiation in the case of bills, as these factors will show whether the last holder is a holder in due course or not; and b. when the instrument is an interest-bearing one, to BAR OPERATIONS 2011

determine when the interest starts to run. 3. Antedating or postdating an instrument does not affect validity or negotiability, unless done for an illegal or fraudulent purpose. REAL DEFENSES – Those that attach to the instrument itself and are available against all holders, whether in due course or not. (WAD FIMMU WIFE) 1. Want of delivery of incomplete instrument; 2. Alteration; 3. Duress amounting to forgery; 4. Fraud in factum or fraud in esse contractus; 5. Insanity where the insane person has a guardian appointed by the court; 6. Minority; 7. Marriage in the case of a wife; 8. Ultra vires acts of a corporation; where the corporation is absolutely prohibited by its charter or statute from issuing any commercial paper under any circumstances; 9. Want of authority of agent; 10. Illegality of contract where it is the contract or instrument itself which is expressly made illegal by statute; 11. Forgery; Page 8

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12. Execution instrument public enemies

of between

PERSONAL DEFENSES/ EQUITABLE DEFENSES – Those which are available only against a person not a holder in due course or a subsequent holder who stands in privity with him. (W2A4F2I4N2MU) 1. Want of delivery of complete instrument; 2. Want of authority of agent where he has apparent authority. 3. Absence or failure of consideration, partial or total; 4. Acquisition of the instrument by force, duress or fear; 5. Acquisition of the instrument by unlawful means; 6. Acquisition of the instrument for an illegal consideration; 7. Filling up of blank contrary to authority given or not within reasonable time, where the instrument is delivered; 8. Fraud in inducement; 9. Insertion of wrong date in an instrument, where it is payable at a fixed period after date and it is issued undated or where it is payable at a fixed period BAR OPERATIONS 2011

after sight and the acceptance is undated; 10. Intoxication; 11. Insanity where there is no notice of insanity on the part of the one contracting with the insane person; 12. Illegality of contract where the form or consideration is illegal; 13. Negotiation in breach of faith; 14. Negotiation under circumstances that amount to fraud; 15. Mistake; 16. Ultra vires acts of corporations where the corporation has the power to issue negotiable paper but the issuance was not authorized for the particular purpose for which it was issued. INSERTION OF DATE (Sec.13) Rule: If there is a date and it is changed, apply Sec.124 on ALTERATION OF AN INSTRUMENT. The date may be inserted in an instrument when: a. An instrument expressed to be payable at a fixed period after date is issued undated b. Where acceptance of an instrument payable at a Page 9

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fixed period after sight is undated (Sec. 13 NIL) Effects: - Any holder may insert the true date of issuance or acceptance - The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course - As to the holder in due course, the date inserted (even if it be the wrong date) is regarded as the true date. As to a holder in due course- the date inserted is the true date. Subsequent Holder in Due Course not affected by the following deficiencies: a. Incomplete but delivered instrument (Sec. 14) b. Complete but undelivered (Sec. 16) c. Complete and delivered issued without consideration or a consideration consisting of a promise which was not fulfilled (Sec 28) Holder in Due Course Affected by Abnormality/Deficiency: a. b.

Incomplete and undelivered instrument (Sec. 15) Maker/drawer’s signature forged (Sec. 23)

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Incomplete but Delivered Instrument: (Sec.14) (2004 & 2005 Bar Exam) 1. Where an instrument is wanting in any material particular: a. Holder has prima facie authority to fill up the blanks therein. b. It must be filled up strictly in accordance with the authority given and within a reasonable time. c. If negotiated to a holder in due course, it is valid and effectual for all purpose as though it was filled up strictly in accordance with the authority given and within reasonable time. (Sec. 14 NIL) 2. Where only a signature on a blank paper was delivered: a. It was delivered by the person making it in order that it may be converted into a negotiable instrument b. The holder has prima facie authority to fill it up as such for any amount. (Sec. 14 NIL) Notes on Section 14 Rule: Sec. 14 applies if there is a signature on the instrument for the purpose of giving effect thereto. Rule: If no signature, refer to Sec. 15 or 23.

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Rule: Sec. 14 is merely PERSONAL DEFENSE.

a

 If the instrument is wanting in material particular, mere possession of the instrument is enough to presume prima facie authority to fill it up.  Material particular may be an omission which will render the instrument non-negotiable (e.g. name of payee), an omission which will not render the instrument non-negotiable (e.g. date)  In the case of the signature in blank, delivery with intent to convert it into a negotiable instrument is required. Mere possession is not enough. Incomplete and Undelivered Instrument: (Sec.15) There are two steps in the execution of a NI: 1. The act of writing the instrument comion of giving effect pletely and in accordance with Sec. 1 of NIL; and 2. The delivery of the instrument with the intention of giving effect thereto  If Completed and negotiated without authority, not a valid contract against a person who has signed before delivery of the contract against a person BAR OPERATIONS 2011

who has signed before delivery of the contract even in the hands of a HDC but subsequent indorsers are liable. REASON: The law does not make any distinction between a HDC and one who is not a HDC. Notes on Section 15  It is a real defense. It can be interposed against a holder in due course.  Where an INCOMLETE and UNDELIVERED instrument is in the hands of a HDC, there is PRIMA FACIE PRESUMPTION of delivery.  Defense of the maker is to prove non-delivery of the incomplete instrument. Complete but Undelivered: (Sec.16) General Rule: Every contract on a negotiable instrument is incomplete and revocable until delivery for the purpose of giving effect thereto. . a. If between immediate parties and remote parties not holder in due course, to be effectual there must be authorized delivery by the party making, drawing, accepting or indorsing. Delivery may be shown to be conditional or for a special purpose only

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c.

If the holder is a holder in due course, all prior deliveries conclusively presumed valid If instrument not in hands of drawer/maker, valid and intentional delivery is presumed until the contrary is proven (Sec. 16 NIL)

Rules on delivery of negotiable instruments: 1) Delivery is essential to the validity of any negotiable instrument 2) As between immediate parties or those is like cases, delivery must be with intention of passing title 3) An instrument signed but not completed by the drawer or maker and retained by him is invalid as to him for want of delivery even in the hands of a holder in due course 4) But there is prima facie presumption of delivery of an instrument signed but not completed by the drawer or maker and retained by him if it is in the hands of a holder in due course. This may be rebutted by proof of nondelivery. 5) An instrument entrusted to another who wrongfully completes it and negotiates it to a holder in due course, delivery to the agent or custodian is sufficient delivery to bind the maker or drawer. BAR OPERATIONS 2011

6) If an instrument is completed and is found in the possession of another, there is prima facie evidence of delivery and if it be a holder in due course, there is conclusive presumption of delivery. 7) Delivery may be conditional or for a special purpose but such do not affect the rights of a holder in due course. Rules on Interpretation Instruments:

of

1. Discrepancy between the Amount in Figures and that in Words - the words prevail, but if the words are ambiguous, reference will be made to the figures to fix the amount. 2. Instrument NOT dated - considered dated on the date of issue 3. Conflict between Written and Printed Provisions - written provisions prevail 4. Interest provided for, but No starting Date was specified - starting date is the date of the instrument, in the absence of said date, from date of issue 5. Instrument Ambiguous - if the instrument is ambiguous such that there is doubt whether it is a bill or note, the holder may treat it Page 12

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as a note or a bill at his option. 6. Signature on Instrument does not Indicate Capacity in Which Made - Where it cannot be determined in what capacity a person affixed his signature to a negotiable instrument, he is deemed to have signed as an indorser. As indorser, his liability under the instrument is secondary, meaning that if the party primarily liable cannot pay, the indorser can be made to pay by the holder of the instrument. 7. Where Promissory Note worded “Promise to Pay” is signed by two (2) makers - Under Section 17 (g) of the NIL and Article 1216 of the Civil Code, where the promissory note was executed jointly and severally by two or more persons, the payee of the promissory note had the right to hold any one of the two (2) signers of the promissory note responsible for the payment of the whole amount of the note. (Philippine National Bank vs. Concepcion Milling Co., 5 SCRA 745). RULE ON SIGNATURES General Rule: A person whose signature does not appear BAR OPERATIONS 2011

on the instrument in not liable. Exception: a. One who signs in a trade or assumed name (Sec. 18) b. A duly authorized agent (Sec. 19) c. A forger (Sec. 23) LIABILITY of a person SIGNING AS AGENT: An agent is exempt from personal liability, provided he: 1. Acts within the scope of his authority; 2. Discloses the name of his principal; and 3. Discloses that he is acting in a representative capacity (Sec. 20) Notes on Section 20 General rule: An agent is not liable on the instrument if he were duly authorized to sign for or on behalf of a principal.  If an agent does not disclose his principal, the agent is personally liable on the instrument. Per Procuration - operates as notice that the agent has a limited authority to sign. Effects: - The principal in only bound if the agent acted within the limits of the authority given Page 13

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- The person who takes the instrument is bound to inquire into the extent and nature of the authority given. (Sec. 21 NIL) General rule: Infants and corporations incur no liability by their indorsement or assignment of an instrument. (Sec. 22 NIL) Effects: - No liability attached to the infant or the corporation - The instrument is still valid and the indorsee acquires title FORGERY A. Maker’s Signature (1989 BEQ) B. Drawer’s Signature (2004,2006&2009 BEQ) C. Payee’s Signature ( 2008 BEQ) D. Indorser’s Signature (2008 BEQ) General rule: A signature, which is forged or made without authority is wholly inoperative. (Sec. 23) Effects: a. No right to retain b. No right to give a discharge c. No right to enforce payment can be acquired. BAR OPERATIONS 2011

Exception: - The party against whom it is sought to be enforced is precluded from setting up the forgery or want of authority. (Sec.23) Forgery refers to both a signature which has been forged or made without authority. Thus, Section 23 is not limited to counterfeit signatures since it also applies to genuine ones. * A person whose signature is forged as maker, drawer, payee or indorsee of a note or check was never a party to the instrument. Since his signature does not appear in the instrument, he cannot be held liable thereon by anyone. (Gempsaw v. CA 218 SCRA 682) CUT-OFF RULE: General Rule: Parties prior to the forged signature are cut-off from the parties after the forgery in the sense that prior parties cannot be held liable and can raise the defense of forgery. The holder can only enforce the instrument against parties who became such after forgery. Exception: When the prior parties are precluded from setting up the defense of forgery either because of their warranties, representation or negligence. (Gempsaw v. CA) Page 14

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Persons PRECLUDED from setting up the defense of forgery: 1. Those who admit/warrant the genuineness of the signature in question: indorsers, persons negotiating by delivery and acceptors; 2. Those who by their acts, silence, or negligence, are estopped from claiming forgery; 3. Holder of a bearer instrument —Forged signature is not necessary to the title of the holder.   





 

Notes on Section 23 Section 23 applies only to forged signatures or signatures made without authority Alterations such as to amounts or like fall under section 124 Forms of forgery are a) fraud in factum b) duress amounting to fraud c) fraudulent impersonation Only the signature forged or made without authority is inoperative, the instrument or other signatures which are genuine are affected The instrument can be enforced by holders to whose title the forged signature is not necessary drawee bank is conclusively presumed to know the signature of its drawer if endorser’s signature is forged, loss will be borne by the forger and parties subsequent thereto

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 drawee bank is not conclusively presumed to know the signature of the indorser. The responsibility falls on the bank which last guaranteed the indorsement and not the drawee bank.  Where the payee’s signature is forged, payments made by the drawee bank to collecting bank is ineffective. No debtor/creditor relationship is created. An agency to collect is created between the person depositing and the collecting bank. Drawee bank may recover from collecting bank who may in turn recover from the person depositing. Rules on liabilities of parties on a forged instrument: In a PN - A party whose indorsement is forged on a note payable to order and all parties prior to him including the maker cannot be held liable by any holder - A party whose indorsement is forged on a note originally payable to bearer and all parties prior to him including the maker may be held liable by a holder in due course provided that it was mechanically complete before the forgery - A maker whose signature was forged cannot be held liable by any holder Page 15

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In a BOE - The drawer’s account cannot be charged by the drawee where the drawee paid - The drawer has no right to recover from the collecting bank - The drawee bank can recover from the collecting bank - The payee can recover from the drawer - The payee can recover from the recipient of the payment, such as the collecting bank - The payee cannot collect from the drawee bank - The collecting bank bears the loss but can recover from the person to whom it paid - If payable to bearer, the rules are the same as in PN. - If the drawee has accepted the bill, the drawee bears the loss and his remedy is to go after the forger - If the drawee has not accepted the bill but has paid it, the drawee cannot recover from the drawer or the recipient of the proceeds, absence any act of negligence on their part. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration. (Sec. 24) Effects: BAR OPERATIONS 2011

- Every person whose signature appears thereon is a party for value - Presumption is disputable Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. (Sec. 26)

Absence of Consideration: (1995 and 1996 Bar Exam) Effect of want of consideration: a. Personal defense to the prejudice of a party and available against any person not holder in due course. b. Partial failure of consideration is a defense pro tanto, whether the failure is an asceratained and liquidated amount otherwise. (Sec 29) Notes on Section 28  Absence of consideration is where no consideration was intended to pass.  Failure of consideration implies that consideration was intended by that it failed to pass  The defense of want of consideration is ineffective against a holder in due course Page 16

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 A drawee who accepts the bill cannot allege want of consideration against the drawer Accommodation Legal arrangement under which a person called the accommodation party lends his name and credit to another called the accommodated party, without consideration. Effect: A person to whom the instrument thus executed is subsequently negotiated, has a right of recourse against the accommodation party inspite of the former’s knowledge that no consideration passed between the accommodation and accommodated parties. Requisites of Accommodation: 1. The accommodation party must sign as maker, drawer, acceptor or indorser; 2. No value is received by the accommodation party from the accommodation party; and 3. The purpose is to lend the name. (Crisologo-Jose v. CA, 177 SCRA 594). Accommodation Party – Is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefore, and for the purpose of lending his name to another person. (2003 and 2005 BEQ) BAR OPERATIONS 2011

 A corporation cannot act as an accommodation party. Such is an ultra vires act. (CrisologoJose v CA, 117SCRA594) Liability of the Accommodation Party: - The accommodation party is liable on the instrument to a holder for value notwithstanding that such holder at the time of taking the instrument knew him to be only an accommodation party. It is a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. He is liable to a holder for value by virtue of his being an accommodation party. *An accommodation party to a negotiable instrument, inspite of the lack of consideration between him and the accommodated party, is liable to any other holder NOT to the accommodated party. (Travel-On, Inc. v. CA, et al, 210 SCRA 351). *An accommodation party’s liability as a solidarily party is unconditional party is unconditional and is not affected by an extension of payment granted by the creditor to the debtor. HOWEVER, where the holder allowed payments by the drawer direct to the contractor without availing of the deed of assignment in its favor, said Page 17

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holder is a bad faith holder, NOT a holder in due course against whom an extension to pay granted by the drawer is a defense by the accommodation party. (Prudencio v. CA, 143 SCRA 6). *The liability of an accommodation party does not extend to corporate accommodation because the act of the corporate officers is ultra vires. However, these officers are personally liable. (Crisologo-Jose v. CA, 177 SCRA 594). *A promissory note, with an accommodation co-maker, used to settle an estafa case, has an illegality of cause, and does not make the accommodation comaker liable. (United General Industries v. Paler, 112 SCRA 404) *A promissory note with an accommodation maker, utilized to settle an estafa case, has an illegal consideration, and does not make the co-maker liable. (United Industries v. Paler, 112 SCRA 404) RIGHTS OF AN ACCOMMODATION PARTY 1. Against the Accommodated Party - the accommodation party, if obliged to pay to a holder of value, can seek reimbursement from the accommodated party.

2. Against the Coaccommodation Party to the use of some other persons where a solidary accommodation maker paid to the bank the balance due on a promissory note, he may seek contribution from the other solidary accommodation maker, in the absence of a contrary agreement between them. This rights springs from an implied promise between the accommodation makers to share equally the burdens resulting from their execution of the note. They are joint guarantors of the principal debtor. (Sadaya v. Sevilla). A solidary accommodation maker may: a. demand from the principal debtor reimbursement of the amount which he paid on the promissory note and b. c. demand contribution from his co-accommodation maker, without first directing his action against the principal debtor, PROVIDED that: b.1. he made the payment by virtue of a judicial demand, or b.2. the principal debtor is insolvent. NEGOTIATION An instrument is when:

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negotiated Page 18

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

a. It is transferred from one person to another b. That the transfer must be in a manner as to constitute the transferee a holder Modes of Negotiation: 1. If payable to bearer, it is negotiated by delivery. Negotiation of negotiable instrument may be effected by the delivery alone of the instrument to the transferee in those negotiable instruments which are: -originally payable to bearer, or -originally payable to order instruments where the last indorsement is an indorsement in blank. 2. If payable to order, it negotiated by the indorsement of the holder completed by delivery. A negotiable instrument payable to the order of a specified person, or to him or his order, may be negotiated by the payee by indorsement followed by delivery of the instrument to the indorsee. Subsequent negotiation may be made in this manner if the holder who indorses acquired the instrument under a special indorsement. BAR OPERATIONS 2011

The payee of the negotiable instrument acquires no interest with respect thereto until its delivery to him. (Development Bank of Rizal v. Sima Wei) 3. Another method of transfer is by assignment which generally refers to ordinary contracts, and by operation of law, where title to a note or bill passes upon the death of the holder to his personal representative. Indorsement to be valid must be: a. Written b. On the instrument itself or upon a piece of paper attached (Sec. 31 NIL) Notes on Section 31  The paper attached with the indorsement is an allonge  An allonge must be attached so that it becomes a part of the instrument, it cannot be simply pinned or clipped to it. Kinds of Indorsements: a. b. c. d. e.

Special (Sec. 34) Blank (Sec. 35) Restrictive (Sec. 36) Qualified (Sec. 38) Conditional (Sec. 39)

A. SPECIALspecifies the person to whom or to whose order, the instrument is to be payable. (Sec. 34) Page 19

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

B. BLANK- Specifies no person to whom or to whose order the instrument is to be payable. 1. Instrument becomes payable to bearer and may be negotiated by delivery (Sec. 34) 2. May be converted to a special indorsement by writing over the signature of the indorser in blank any contract consistent with character of indorsement. (Sec. 35) C. ABSOLUTE- One by which indorser binds himself to pay: a. Upon No order condition than failure of prior parties to do so; and b. Upon due notice to him of such failure. D. CONDITIONAL- right of the indorsee is made to depend on the happening of a contingent event. Party required to pay may disregard the conditions. (Sec. 39) E. RESTRICTIVEAn indorsement is restrictive, when it either: a. Prohibits further negotiation of the instrument; or b. Constitutes the indorsee the agent of the indorser; or c. Vests the title in the indorsee in trust for or BAR OPERATIONS 2011

to the use of some other persons.  But mere absence of words implying power to negotiate does not make an indorsement restrictive. (Sec. 36) EFFECT of Restrictive indorsement: Confers upon the indorsee the righta. Receive payment of the instrument; b. Bring any action thereon that the indorser could bring; c. To transfer his rights as such indorsee, when the form of the instrument authorizes him to do so. F. QUALIFIED- Constitutes the indorser a mere assignor of the title to the instrument. ( Sec38)  It is made by adding to the indorser’s signature words like “sans recourse”, “without recourse”, “indorser not holder”, “at the indorsers own risk”, other terms of similar import. * Hence, it has been held that oral testimony is not admissible to establish that an unqualified indorsement is in fact qualified. ( Velasco v. Tan Liuan & Co., March 17,1922)

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 A Qualified indorser has limited liability, i. e. he is liable for breach of warranty if the instrument is dishonored by non-acceptance or non- payment due to: 1. Forgery; or 2. Lack of good title on the part of the indorser; or 3. Lack of capacity to indorse on the part of the prior parties; or 4. The fact that at the time of the endorsement, the instrument was valueless or nit valid, and he knew of the fact.  A Qualified indorsement does not impair the negotiable character of the instrument. As mentioned earlier, Negotiation is the transfer of a negotiable instrument from one person to another as to constitute the transferee the holder thereof. To be valid, negotiation must involve the entire instrument. Effects of indorsing an instrument originally payable to bearer: - It may further be negotiated by delivery - The person indorsing is liable as indorser to such persons as to make title through his indorsement (Sec. 40) BAR OPERATIONS 2011

Notes on Section 40  Section 40 applies only to instruments originally payable to bearer  It cannot apply where the instrument is payable to bearer because the only or last indorsement is in blank A holder may strike out any indorsement which is not necessary to his title. (Sec. 48) Effects: - An indorser whose indorsement is struck out is discharged - All indorsers subsequent to such indorser who has been discharged are likewise relieved Effects of a transfer without endorsement: - The transferee acquires such title as the transferor had - The transferee acquires the right to have the indorsement of the transferor - Negotiation takes effect as of the time the indorsement is actually made (Sec. 49) WHO IS A HOLDER IN DUE COURSE? Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the Page 21

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holder to prove that he or some person under whom he claims acquired the title as holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. (Sec. 59) RIGHTS OF A HOLDER - A holder may sue in his own name -A holder may receive payment. Effects: (Sec. 51 NIL) - If in due course it discharges the instrument *Note: Holder in due Course (Secs. 52,57&59) Personal and Real Defenses ( 2000 & 2009 BEQ) Requisites for a Holder in Due Course (HDC): a. Receives the instrument complete and regular on its face b. Became a holder before it was overdue and had no notice that it had been previously dishonored if such was the fact c. Takes the instrument for value and in good faith d. At time he took the instrument, no notice of infirmity in instrument or defect in the title of the BAR OPERATIONS 2011

person negotiating it (Sec. 52 NIL) *Note: Under the "SHELTER PRINCIPLE," the holder-in-due course, by negotiating the instrument, to a party not a holder-in-due course, transfers all his rights as such holder to the latter, who thus acquires the right to enforce the instrument as if he was a holder-in-due course. However, this principle presupposes that the "sheltered" holder is not a party to any fraud or illegality impairing the validity of the instrument. (2008 BEQ) Notes on Section 52  Every holder is presumed to be a HDC (Sec. 59)  If one of the requisites are lacking, the holder is not a HDC  An instrument is considered complete and regular on its face if a) the omission is immaterial b) the alteration on the instrument was not apparent on its face  An instrument is overdue after the date of maturity.  On the date of maturity, the instrument is not overdue and the holder is a HDC  Acquisition of the transferee or indorsee must be in good faith  Good faith means lack of knowledge or notice of defect or infirmity Page 22

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

A holder is not a HDC where an instrument payable on demand is negotiated at an unreasonable length of time after its issue (Sec. 53 NIL) Rights of a Holder in Due Course:

- A holder, who derives his title through a HDC and is not a party to any fraud or illegality affecting the instrument, has all the rights of such HDC in respect to all parties prior. (Sec. 58 NIL)

- Holds the instrument free from any defect of title of prior parties - Free from defenses available to prior parties among themselves (personal/ equitable defenses) - May enforce payment of the instrument for the full amount against all parties liable(Sec. 57 NIL)

Rights of a holder not a HDC - May sue in his own name - May receive payment and if it is in due course, the instrument is discharged - Holds the instrument subject to the same defenses as if it were non-negotiable - If he derives his title through a HDC and is not a party to any fraud or illegality thereto, has all the rights of such HDC

Notes on Section 57  Personal or equitable defenses are those which grow out of the agreement or conduct of a particular person in regard to the instrument which renders it inequitable for him through legal title to enforce it. Can be set up against holders not HDC  Legal or real defenses are those which attach to the instrument itself and can be set up against the whole world, including a HDC.  An instrument not in the hands of a HDC is subject to the same defenses as if it were nonnegotiable. Exception:

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General rule: Every holder is deemed prima facie to be a holder in due course. Exception: - Where it is shown that the title of any person who has negotiated the instrument is defective, the burden is on the holder to prove that he is a HDC or that a person under whom he claims is a HDC (Sec. 59 NIL) DEFENSES OF PRIOR PARTIES AGAINST THE HOLDER Classes of Defenses: 1. Real or Absolute Defenses - a real or absolute defense is a defense which attaches Page 23

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to the instrument irrespective of the parties and is predicated on the principle that the right sought to be enforced has never existed or has ceased to exist. - A real defense is available against ALL HOLDERS, whether in due course or not. 2. Personal or Equitable Defenses - a personal or equitable is a defense growing out of an agreement or conduct of a particular person in regard to an instrument which renders it inequitable for him although owner of it, to enforce it against the defendant. Personal Defenses 1. Absence or failure of consideration 2. Want of delivery of complete instrument 3. Insertion of wrong date where payable at a fixed period after date and issued undated; or at a fixed

Real Defenses Alteration Want of delivery of incomplete instrument Duress amounting to forgery

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period after sight and acceptance is undated 4. Filling up the blanks contrary to authority given or not within reasonable time 5. Fraud in inducement 6. Acquisition of the instrument by force, duress or fear

Fraud in factum or in esse contractus Minority Marriage in case of a wife

Insanity where 7. Acquisition the insane of the person has a instrument by guardian unlawful means appointed by the court Ultra vires acts of a corporation where its 8. Acquisition of charter or by the instrument statue, it is for an illegal prohibited from consideration issuing commercial paper 9. Negotiation Want of in breach of authority of faith agent 10. Negotiation Execution of under instrument circumstances between public amounting to enemies fraud Illegality of 11. Mistake contract made Page 24

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

by statue 12. Intoxication Forgery 13. Ultra vires acts of corporations 14. Want of authority of the agent where he has apparent authority 15. Illegality of contract where form or consideration is illegal 16. Insanity where there is no notice of insanity LIABILITIES OF PARTIES: 1. A maker is primarily liable: Effects of making the instrument, the maker: a. Engages to pay according to tenor of instrument b. Admits existence of payee and his capacity to indorse (Sec. 60 NIL) Notes on Section 60  A maker’s liability is primarily and unconditional  One who has signed as such is presumed to have acted with care and to have signed with full knowledge of its contents, unless fraud is proved BAR OPERATIONS 2011

 The payee’s interest is only to see to it that the note is paid according to its terms  When two or more makers sign jointly, each is individually liable for the full amount even if one did not receive the value given  The maker is precluded from setting up the defense of: a) The payee is fictional, b) That the payee was insane, a minor or a corporation acting ultra vires 2. A drawer is secondarily liable Effects of drawing the instrument, the drawer: a. Admits the existence of the payee, b. The capacity of such payee to indorse c. Engages that on due presentment, the instrument will be accepted or paid or both according to its tenor. If the instrument is dishonored, and the necessary proceedings on dishonor duly taken a. The drawer will pay the amount thereof to the holder b. Will pay to any subsequent indorser who may be compelled to pay it. (Sec. 61 NIL)

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Notes on Section 61  A drawer may insert an express stipulation to negative or limit his liability 3. An acceptor is primarily liable By accepting the instrument, an acceptor: - Engages that he will pay according to the tenor of his acceptance - Admits the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument - The existence of the payee and his then capacity indorse 4. IRREGULAR INDORSER - a person not otherwise a party to an instrument places his signature in blank before delivery is liable as an indorser in the following manner: a. If payable to order of a third person – liable to the payee and to all subsequent parties b. If payable to order of the maker or drawer – liable to all parties subsequent to the maker or drawer c. If payable to bearer – liable to all parties subsequent to the maker or drawer d. If signs for an accommodation party – liable to all parties subsequent to the payee (Sec. 64) BAR OPERATIONS 2011

*Note: Irregular Indorser v. General Indorser (2005 BEQ) Irregular Indorser, is not a party to the instrument but he places his signature in blank before delivery. He is not a party but he becomes one because of his signature in the instrument. Because his signature he is considered an indorser and he is liable to the parties in the instrument. While, a General Indorser warrants that the instrument is genuine, that he has a good title to it, that all prior parties had capacity to contract; that the instrument at the time of the indorsement is valid and subsisting; and that on due presentment, the instrument will be accepted or paid or both accepted and paid according to its tenor, and that if it is dishonored, he will pay if the necessary proceedings for dishonor are made. 5. Warranties where negotiating by delivery or qualified endorsement: a. The instrument is genuine and in all respect what it purports to be b. The indorser has good title to it c. All prior parties had the capacity to contract d. Indorser has no knowledge of any fact that would impair the validity or the value of the instrument. Page 26

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Limitations of warranties: - If by delivery – extends only to immediate transferee - Warranty of capacity to contract does not apply to persons negotiating public or corporate securities (Sec. 65 NIL) Notes on Section 65  A qualified indorser is one who indorses without recourse or sans recourse  Recourse - resort to a person secondarily liable after default of person primarily liable  A qualified indorser cannot raise the defense of a) forgery b) defect of his title or that it is void c) the incapacity of the maker, drawer or previous indorsers.  A qualified Indorsement makes the indorser mere assignor of title of instrument, relieves him of general obligation to pay if instrument is dishonored, but he is still liable for the warranties arising from instrument only up to warranties of general indorser  The warranty is to the capacity of prior parties at the time the instrument was negotiated. Subsequent incapacity does not breach the warranty.  lack of knowledge of the indorser as to any fact that would impair the validity or the

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value of the instrument must be subsisting all throughout  A person Negotiating by Delivery warrants same as those of qualified indorser and extends to immediate transferees only Warranties of a general indorser: a. The instrument is genuine and in all respect what it purports to be b. The he has good title to it c. All prior parties had the capacity to contract d. That the instrument at the time of his indorsement was valid and subsisting (Sec. 66) In addition: - Engages that the instrument will be accepted or paid or both according to its tenor on due presentment - Engages to pay the amount thereof if it be dishonored and the necessary proceedings on dishonor are taken Notes on Section 66  The indorser under Section 66 warrants the solvency of a prior party  The indorser warrants that the instrument is valid and subsisting regardless of whether he is ignorant of that fact or not.

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 Warranties extend in favor of a) a HDC b) persons who derive their title from HDC c) immediate transferees even if not HDC  The indorser does not warrant the genuineness of the drawer’s signature  General indorser is only secondarily liable PRESENTMENT FOR PAYMENT General rule: Presentment for payment is not necessary to charge persons primarily liable on the instrument. Presentment for payment is necessary to charge the drawer and indorsers. (Sec 70 NIL) Presentment is necessary to charge persons secondarily liable otherwise they are discharged Notes on Section 70  Presentation for payment – production of a BOE to the drawee for his acceptance, or to a drawee or acceptor for payment. Also presentment of a PN to the party liable for payment of the same.  Consists of a) a personal demand for payment at a proper place b) the bill or note must be ready to be exhibited if required and surrendered upon payment.

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 Parties primarily liable – persons by the terms of the instrument are absolutely required to pay the same. E.g maker and acceptors. They can be sued directly.  If payable at the special place, and the person liable is willing to pay there at maturity, such willingness and ability is equivalent to tender of payment.  Acts needed to charge persons secondarily liable: a) Presentment for payment/acceptance b) Dishonor by nonpayment/non-acceptance c) Notice of dishonor to secondary parties  Acts needed to charge persons secondarily liable in other cases: a) Protest for non-payment by the drawee b) Protest for non-payment by the acceptor for honor Proper presentment: a. By the holder or an authorized person b. At a reasonable hour on a business day c. At a proper place d. To the person primarily liable or if absent to any person found at the place where presentment is made (sec. 72 NIL)

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Presentment for payment is made to the maker, or acceptor. Not to the person secondarily liable. Notes on Section 72  Only the holder or one authorized by him has the right to make presentment for payment  Presentment cannot be made on a Sunday or holiday  If the instrument is payable on demand – a) if it is a note – presentment must be made within reasonable time after issue b) if it is a bill presentment must be made within reasonable time after last negotiation. General rule: Presentment for payment is necessary to charge persons secondarily liable otherwise they are discharged: Exception: 1. Presentment not required to charge the drawer: a. He has no right to expect b. He has no right to require that the drawee or acceptor will pay (Sec 79) 2. Presentment not required to charge the indorser where: a. The instrument was made or accepted for his accommodation BAR OPERATIONS 2011

b. He has no reason to expect that the instrument will be paid if presented (Sec. 80) Notes on Section 79 and 80  Only the drawer or indorser are not discharged. All other parties secondarily liable are discharged. Presentment for payment is dispensed with if: a. After due diligence, presentment cannot be made b. Presentment is waived c. The drawee is a fictitious person (Sec 82) Notes on Section 82  What is excused is the failure to make presentment. There is no need to make any presentment versus under section 81 (delay in presentment) presentment for payment is still required after the cause of delay has ceased. Other instances where presentment for payment is not required: 1. in order to charge the drawer, where he has no right to expect or require that the drawee or acceptor will pay the instrument; 2. in order to charge an indorser, where the instrument was made or accepted for his accommodation and he has no right to expect that the Page 29

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

instrument will be paid if presented; and 3. when a bill is dishonored by non-acceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and presentment for payment is necessary Summary of rules as to presentment for payment: a. Presentment not necessary to charge persons primarily liable b. Necessary to charge persons secondarily liable except: - The drawer under Sec. 79 - The indorser under Sec. 80 - When excused under Sec. 82 - When the instrument has been dishonored by nonacceptance under Sec. 83 When instrument dishonored by non-payment The instrument is dishonored by non-payment when: a. it is duly presented for payment and payment is refused or cannot be obtained; or b. presentment is excused and the instrument is overdue and unpaid. Effects of dishonor by nonpayment: - An immediate right of recourse to all parties secondarily liable accrues to the holder (Sec. 84) - An “immediate right of recourse” means that the BAR OPERATIONS 2011

holder, after the instrument is dishonored by non-payment and notice of dishonor given to the persons secondarily liable, may sue any of the latter without suing first the persons primarily liable. Notes on Section 84  Parties cease to be secondarily liable and become principal debtors.  Liability becomes the same as that of the original obligors. NOTICE OF DISHONOR When a negotiable instrument has been dishonored by non-acceptance non-payment, notice of dishonor must be given to the drawer and to each indorsers. Any drawer or indorser to whom such notice is not given is discharged. Exceptions: a. Waiver (Sec. 109) b. Notice is dispensed (Sec. 112) c. Not necessary to Drawer (Sec. 114) d. Not necessary to Indorser (Sec. 115) - If notice is delayed, delay may be excused (Sec. 113)

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Notice of Dishonor may be given: a. By or on behalf or the holder b. By or on behalf of any party who: - Is a party to the instrument and might be compelled to pay the instrument. - To a holder who having taken it up would have a right of reimbursement from the party to whom notice is given. (Sec. 90) Notes on Section 111  Where notice is waived, presentment is not waived  Where presentment is waived, notice is also waived  Where protest is waived, notice and presentment is waived Effects of notice: a. Where notice is given by or on behalf of the holder, it inures for the benefit of all subsequent holders and all prior parties who have a right of recourse against the party to whom it is given. b. Where notice is given by or on behalf of a party entitled to give notice, it inures for the benefit of the holder and all parties subsequent to the party to whom it is given. Forms of notice: BAR OPERATIONS 2011

a. May be written or oral b. Written notice need not be signed or may be supplemented by verbal communication c. May be by personal delivery or by mail Notice may be waived either expressly or implied: a. Before the time of giving notice has arrived b. After the omission to give due notice Dispensation with Notice: Notice of dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. Effects of failure to give notice: An omission to give notice of dishonor by non-acceptance does not preclude the rights of a holder in due course subsequent to the omission. Instances when Notice Not Required to Indorser a. Drawee was a fictitious/incapacitated person and the indorser was aware of such at the time of indorsement b. Indorser is the person to whom instrument was presented for payment c. Instrument made/accepted for his accommodation Page 31

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ b.

Discharge of the Instrument A negotiable instrument is discharged: a. By payment in due course by or on behalf of the principal debtor; b. Payment by in due course by party accommodated, where the instrument is made or accepted for accommodation; c. Intentional cancellation by holder of instrument; d. Any other act discharging a simple contract for the payment of money; e. When the principal debtor becomes the holder of the instrument at or after maturity in his own right. NOTES ON SECTION 119  Discharge of the instrument discharges all the parties thereto  Payment must be in due course, and by the principal debtor or on his behalf  If payment is not made by the principal debtor, payment only cancels the liability of the payor and those obligated after him but does not discharge the instrument.  Payment by an accommodation party does not discharge the instrument. Discharge of Secondary Parties: a.

Any act discharging instrument

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c. d. e. f.

Cancellation of indorser’s signature by indorsers Discharge of prior party Tender of payment by prior party Release of principal debtor Extension of payment by the holder/postponement of right to enforce without assent of secondary parties and without reservation of right of recourse against secondary parties (Sec 120 NIL)

RIGHT OF PARTY WHO DISCHARGES INSTRUMENT (Sec. 121) A party secondarily liable who pays the instrument does not discharge it , but instead acquires certain rights ; 1.Collect from prior parties ; or 2. Negotiate the instrument to new parties- but not to subsequent parties. However , Under the exceptions provided in Sec.121, the instrument is considered discharged when ; 1.The BOE is payable to the order of a third person and paid by the drawer himself, or 2. Where it was made or accepted for accommodation , and has been paid by the party accommodated. RENUNCIATION BY (Sec 122)

HOLDER.

the Page 32

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Renunciation- The act of giving up or abandoning a right without transferring the right to another. As a Rule ,the holder may expressly renounce his rights against any party to the instrument before , or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor at or after maturity of the instrument discharges the instrument. However , A renunciation does not affect the rights of a holder in due course without notice of the renunciation. Notes on Section 122  if renounced in favor of a party secondarily liable, only he is exonerated from liability and all parties subsequent to him  discharge by novation is allowed MATERIAL ALTERATION General rule: When materially altered, without the consent of all parties liable, the instrument is avoided except as against: a. The party who has made the alteration b. The party who authorized or assented to the alteration. c. Subsequent indorsers Exception:

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- If in the hands of a HDC, may be enforced according to its original tenor MATERIAL ALTERATION - Any change in the instrument which affects or changes the liability of the parties in any way.  There is no distinction between fraudulent and innocent alteration The EFFECTS of material alteration: 1. Alteration by a PARTY Material alteration by the holder discharged the instrument and all prior parties thereto who did not give their consent to such alteration. Whether the alteration made is favorable or unfavorable to the party making the alteration, no distinction as to the effect is made. The intent of the law is to preserve the integrity of the negotiable instrument. 2. Alteration by a STRANGER ( SPOLIATION ) If subsequently negotiated to a non-Holder in Due Course—A material alteration avoids the instrument as against any prior party who has not assented to the alteration. If subsequently negotiated to a Holder in Due Course—He may Page 33

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

enforce payment thereof according to its original tenor regardless of whether the alteration was innocent or fraudulent. CHANGES that constitute MATERIAL ALTERATIONS 1. The date; 2. The sum payable, either for principal or interest; 3. The time or place of payment; 4. The number or the relations of the parties; 5. The medium or currency in which payment is to be made; 6. Or which adds a place of payment where no place of payment is specified; or 7. Any other change or addition which alters the effect of the instrument in any respect. (Sec. 125)  A serial number is an item which is not an essential requisite for negotiability under Sec. 1 of NIL, and which does not affect the right of the parties, hence its alteration is not material. (PNB v. CA, 256 SCRA 491) (199 BEQ) Instances where a BOE may be treated as a PN: a. Where the drawer and the drawee are one and the same b. Where the drawee is a fictitious person BAR OPERATIONS 2011

c. Where the drawee has no capacity to contract (Sec. 130) The holder has the option to treat it as a BOE or a PN ACCEPTANCE The signification by the drawee of his assent to the order of the drawer. It is an act by which a person on whom the Bill of Exchange is drawn assents to the request of the drawer to pay it. As a general rule, acceptance, in order to be valid must be: 1. Written; 2. Signed by the drawee; and 3. Must contain an express or implied to pay in money. A holder of a bill has the right: a. Require that acceptance be written on the bill and if refused, treat it as if dishonored (Sec. 133) b. Refuse to accept a qualified acceptance and may treat it as dishonored Acceptance may be: a. Actual b. Constructive c. General (Sec. 140) d. Qualified (Sec. 141) Kind of acceptance: A. Constructive Acceptance: Page 34

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 

a. Where the drawee to whom the bill has been delivered destroys it b. The drawee refuses within 24 hrs after such delivery or within such time as is given, to return the bill accepted or not

c. Local – an acceptance to pay only at a particular place; d. Qualified as to time e. The acceptance of some or more drawees but NOT ALL.

Notes on Section 137 Drawee becomes primarily liable as an acceptor. Mere retention is equivalent to acceptance

- The holder of the bill has the right to require GENERAL ACCEPTANCE – thus he may REFUSE to take qualified acceptance and if he DOES NOT obtain an unqualified acceptance – he may treat the bill as DISHONORED BY NONACCEPTANCE – accordingly the holder must give notice of dishonor.

B. General Acceptance: An acceptance to pay at a particular place is a general acceptance unless it is expressly states that the bill is to be paid there only and not elsewhere. C. Qualified Acceptance – if in express terms varies the effect of the bill as drawn. Kinds of Qualified Acceptance: a. Conditional – one which makes payment by the acceptor dependent on the fulfillment of a condition therein stated; b. Partial – an acceptance to pay part only of the amount for which the bill is drawn;

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- Effect of taking qualified acceptance: - Where a qualified acceptance is taken – THE DRAWER and INDORSERS are discharged from liability on the bill unless they have expressly or impliedly authorized the holder to take qualified acceptance or subsequently assents thereto. Page 35

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

* When the drawer or indorser receives notice of qualified acceptance – he must – within a REASONABLE TIME – express his dissent to the holder or he will be deemed to have assented thereto. Time for acceptance: The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of presentation. Rules governing acceptance: When an acceptance is written on a paper other than a bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receive the bill for value. An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value. Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours after such delivery, or within such other period as the holder may allow, to return the bill accepted BAR OPERATIONS 2011

or non-accepted to the holder, he will be deemed to have accepted the same. A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after is has been dishonored by a previous refusal to accept, or by non-payment. But when a bill payable after sight is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of the first presentment. PRESENTMENT FOR ACCEPTANCE When presentment for acceptance is necessary: a. If necessary to fix the maturity of the bill b. If it is expressly stipulated that it shall be presented for acceptance c. If the bill is drawn payable elsewhere than the residence or place of business of the drawee (Sec. 143 NIL) Notes on Section 143  PRESENTMENT is the production of a bill of exchange to the drawee for his acceptance. Page 36

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ



PRESENTMENT  For Acceptance (Sec. 143)  For Payment ( Sec. 70) ( 2000 & 2003 BEQ)

PURPOSE: To get acceptance of the drawer for purpose of making him primarily liable as an acceptor. Presentment is also prerequisite to the accrual of secondary liability against the drawer and the indorsers. On what days presentment must be made: A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment. When Saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o’clock noon, on that day. Presentment for must be made:

acceptance

1. Where the bill is payable after sight; or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument. 2. Where the bill expressly stipulates that it shall be presented for acceptance. 3. Where the bill is drawn payable elsewhere than the residence or place of business of the drawee. BAR OPERATIONS 2011

Presentment, How made: Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and (a.) Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all, unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him alone; (b.) Where the drawee has been dead, presentment may be made to his personal representatives; (c.) Where the drawee has been adjudged a bankrupt or an insolvent, or has made an instrument for the benefit of creditors, presentment may be made to him or to his trustee or assignee. WHERE PRESENTMENT EXCUSED. (Sec. 148.)

IS

Presentment for acceptance is excused , and a bill may be treated as dishonored by non acceptance , in either of the following cases: 1. Where the drawee is dead , or has absconded , or is a fictitious person or a person not having capacity to contract. Page 37

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

2. Where, after the exercise of reasonable diligence , presentment cannot be made. 3. Where, although presentment has been irregular , acceptance has been refused on some other ground. When bill is dishonored by nonacceptance A bill is dishonored by nonacceptance: a. When it is duly presented for acceptance and such an acceptance as is refused or cannot be obtained; b. When presentment for acceptance is excused, and the bill is not accepted. Duty of the holder where bill is not accepted. Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by nonacceptance or he loses the right of recourse against the drawer and indorsers. HOW? By giving NOTICE OF DISHONOR or by making a PROTEST when required. Rights of holder where bill is NOT accepted: An immediate right of recourse against the drawer and indorsers accrues to the holder BAR OPERATIONS 2011

and NO PRESENTMENT payment is necessary.

for

PROMISSORY NOTES AND CHECKS Promissory Note – is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or bearer. NOTE: Where a note is drawn to the maker’s own order, it is NOT complete until indorsed by him. Special types of promissory notes: 1. Certificate of deposit - is a written acknowledgment by a bank of the receipt of money on deposit which the bank promises to pay to the depositor, bearer, or to some other person or order. - It is NOT ipso facto negotiable – it must first comply with the requirements provided under Section 1, NIL. 2. Bonds - A promise, under seal, to pay money. - The bond certifies that the issuing company is indebted Page 38

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

to the bondholder for the amount specified on the face of the bond, and contains an agreement of the company to pay the sum at a specified time in the future, and meanwhile to pay a specified interest on the principal amount at regular intervals, generally six months apart. They are negotiable if it the requisites in Section 1, NIL are complied with.

10.

Bank Notes - Are promissory notes of the issuing bank payable to bearer on demand and intended to circulate as money. They are regarded as cash and pass from hand to hand without any evidence of titled in the holder than that which arises form possession. However, they are not money.

Classes of Bonds: 1. Mortgage bonds; 2. Equipment Bonds; 3. Collateral trust bonds; 4. Guaranteed bonds; 5. Debentures; and 6. Income bonds; 7. Convertible bonds; 8. Redeemable Bonds; 9. Registered Bonds; and - Coupon Bonds – those which are attached a sheet of dated, numbered and similarly printed coupons which the bondholder may cut off when due or thereafter. Such coupons may be served and deposited in a bank, negotiated before the maturity of the interest they represent, and transferred just like any commercial paper. They are negotiable if it the requisites in Section 1, NIL are complied with.

11.

Due Bills - is an instrument whereby one person acknowledges his indebtedness to another.

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CHECKS - a bill of exchange drawn on a bank payable on demand. (Sec. 185) CONCEPTS: Certification of Checks- An agreement whereby the bank against whom a check is drawn, undertakes to pay at any future time when presented for payment. EFFECTS: a. Equivalent to acceptance (Sec 187) and is the operative act that makes the bank liable. b. Assignment of the funds of the drawer in the hands of the drawee (Sec 189) Page 39

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

c. If obtained by the holder, discharges the persons secondarily liable thereon ( Sec 188) A check must be presented for payment within reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. (Sec. 186) Reasonable Time: (Sec. 193) a. Nature of the instrument’ b. Usage of business or trade c. The facts of the particular case CROSSED CHECK: (2004 & 2005 BEQ) - A check which in addition to the usual contents of an ordinary check contains also the name of a certain banker or business entity through whom it must be presented for payment. - A Crossed Check under accepted banking practice, crossing a check is done by writing two parallel lines diagonally on the left top portion of the checks. The crossing is special where the name of the bank or a business institution is written between the two parallel lines, which mean that the drawee should pay only with the intervention of that company. EFFECTS: BAR OPERATIONS 2011

a. That the check may not be encashed; it may only be deposited with the bank; b. That the check may be negotiated only once to a person who has an account with the bank; and c. That it serves as a warning to the holder that the check has been issued for a definite purpose. (Bataan Cigar v. CA 280 SCRA 643) *Note: Crossed Checks vs. Cancelled Checks (2004 BEQ) A crossed check is one with two parallel lines drawn diagonally across its face or across a corner thereof. On the other hand, a cancelled check is one marked or stamped "paid" and/or "cancelled" by or on behalf of a drawee bank to indicate payment thereof. *State Investment House v IAC (GR 72764 13Jul1989), the SC considered a crossed check as subjecting a subsequent holder thereof to the contractual covenants of the payor and the payee. 2 KINDS: 1. CROSSSED SPECIALLY- The same name of a particular bank or company is written or appears between thev. Tan parallel lines in which case the drawee-bank must pay the check only upon presentment by such bank Page 40

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

or company (Chan Wan v. tan Kim 109 Phil 706) on penalty of being made to pay agin by the rightful owner should the first payment prove to have been erroneous. 2. CROSSED GENERALLYonly the words “and Co.” are written between the parallel lines or when none at all is written at all between said lines. * This Court has taken judicial cognizance of the practice that a check with 2 parallel lines in the upper left hand corner means that it could only be deposited and not converted into cash. IRON CLAD RULE – prohibits the countermanding of payment of certified checks. (Rep. v. PNB, Dec. 1, 1961) *Note: The holder must be a holder in due course before the stop payment order may not be successfully invoked against him. (Mesina v. IAC, 146 SCRA 497, 505) TYPES OF CHECKS (Cesar Villanueva, Commercial Law Review, 2004 ed.) a. Cashier’s Check- One drawn by the cashier of a bank, in the name of the bank against the bank itself payable to a third person. It is a primary obligation of the issuing bank and accepted in BAR OPERATIONS 2011

b.

c.

d.

e.

advance upon issuance. (Tan v. CA 239 SCRA 310) Manager’s Check- A check drawn by the manager of a bank in the name of the bank itself payable to a third person. It is similar to the cashier’s check as to the effect and use. Memorandum Check- A check given by a borrower to a lender for the amount of a short loan, with the understanding that it is not to be presented at the bank, but will be redeemed by the maker himself when the loan falls due and which understanding is evidenced by writing the word “memorandum”, “memo” or “mem” on the check. Certified Check- An agreement whereby the bank against whom a check is drawn undertakes to pay it at any future time when presented for payment. (Sec. 187) Traveler’s Check- It is one upon the holder’s signature must appear twice; one to be affixed by him at the time it is issued and the second, for counter-signature, to be affixed by him in the presence of the payee before it is paid, otherwise it is incomplete. CORPORATION LAW Page 41

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

(Batas Pambansa Bilang 68) A. CORPORATION, DEFINED An artificial being created by operation of law having the right of succession, and the powers, attributes and properties expressly authorized by law and incident to its existence. (Sec. 2). It has a separate and distinct personality from its incorporators. (2000 Bar Examination) Attributes of a Corporation 1. It is an artificial being. 2. It is created by operation of law. 3. It enjoys the right of succession. 4. It has the powers, attributes and properties expressly authorized by law or incident to its existence. Theories on Formation of a Corporation: 1. Concession Theory – a corporation is an artificial creature without any existence until it has received the imprimatur of the state acting according to law, through the SEC. (Tayag vs. Benguet Consolidated, Inc., 26 SCRA 242) 2. Theory of corporate enterprise or economic unit – the corporation is not merely an artificial being, but more of an aggregation of persons doing business, or an underlying business unit. BAR OPERATIONS 2011

(Philippine Corporate Law, Cesar Villanueva, 2001 ed.) B. CLASSIFICATION: 1. AS TO ORGANIZERS a. public – by State only; and b. private – by private persons alone or with the State. 2. AS TO FUNCTIONS a. public – government of a portion of the territory; and b. private – usually for profitmaking 3. AS TO GOVERNING LAW a. public – Special Laws; and b. private – Law on Private Corporations 4. AS TO LEGAL STATUS a. De jure corporation – organized in accordance with the requirements of law. b. De facto corporation – organized with a colorable compliance with the requirements of a valid law. Its existence cannot be inquired collaterally. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (Sec. 20) Requisites: 1. The existence of a valid law under which it may be incorporated; 2. A bona fide attempt in good faith to incorporate under such law; Page 42

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

3. Actual use or exercise in good faith of corporate powers; and 4. Issuance of a certificate of incorporation by the SEC as a minimum requirement of continued good faith. The only difference between a de facto corporation and a de jure corporation is that a de jure corporation can successfully resist a suit by a state brought to challenge its existence; a de facto corporation cannot sustain its right to exist. c. Corporation by estoppel – group of persons that assumes to act as a corporation knowing it to be without authority to do so, and enters into a transaction with a third person on the strength of such appearance. It cannot be permitted to deny its existence in an action under said transaction. (Sec. 21) It is neither de jure nor de facto. d. Corporation by prescription – one which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power, e.g. Roman Catholic Church.

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5. AS TO EXISTENCE OF SHARES OF STOCK a. Stock corporation – a corporation (1) whose capital stock is divided into shares and (2) which is authorized to distribute to shareholders’ dividends or allotments of the surplus profits on the basis of the shares held. (Sec. 3) b. Non-stock corporation – does not issue stocks nor distribute dividends to their members. 6. AS TO RELATIONSHIP OF CONTROL AND MANAGEMENT a. Holding Corporation - it is one which controls another as a subsidiary by the power to elect management. It is one that holds stocks in other companies for purposes of control rather than for mere investment. b. Subsidiary Corporation one which is so related to another corporation that the majority of its directors can be elected directly or indirectly by such other corporation. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.) c. Affiliates - company which is subject to common control of a mother holding company and operated as part of the system. Page 43

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

d.

Parent and Subsidiary Corporation separate entities with power to contract with each other. The board of directors of the parent company determines its representatives to attend and vote in the stockholder’s meeting of its subsidiary. The stockholders of the parent company demand representation in the board meetings of its subsidiary.

7. AS TO PLACE OF INCORPORATION a. Domestic corporation- a corporation formed, organized, or existing under Philippine laws. b. Foreign corporation – a corporation formed, organized, or existing under any laws other than those of the Philippines. (Sec. 123) C. NATIONALITY CORPORATION

OF

Test to Determine Nationality of Corporations 1. INCORPORATION TEST – determined by the state of incorporation, regardless of the nationality of the stockholders. 2.

DOMICILE TEST – determined by the state where it is domiciled. The domicile of a corporation is the place fixed by the law

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creating or recognizing it; in the absence thereof, it shall be understood to be the place where its legal representation is established or where it exercise its principal functions. (Art. 51, NCC) 3. CONTROL TEST – determined by the nationality of the controlling stockholders or members. This test is applied in times of war. Also known as the WARTIME TEST. D. CORPORATE PERSONALITY

JURIDICAL

I. Doctrine of Separate Personality A corporation has a juridical personality separate and distinct from that of its stockholders or members. Used for purposes of convenience and to subserve the ends of justice. Consequences/significance: 1. Liability for acts or contracts – obligations incurred by a corporation, acting through its authorized agents are its sole liabilities. (Creese vs. CA, 93 SCRA 483) 2. Right to bring actions – may bring civil and criminal actions in its own name in the same manner as natural persons. (Art. 46, Civil Code) Page 44

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

3. Right to acquire and possess property – property conveyed to or acquired by the corporation is in law the property of the corporation itself as a distinct legal entity and not that of the stockholders or members. (Art. 44(3), Civil Code) 4. Acquisition of court of jurisdiction – service of summons may be made on the president, general manager, corporate secretary, treasurer or inhouse counsel. (Sec. 11, Rule 14, Rules of Court). 5. Changes in individual membership – remains unchanged and unaffected in its identity by changes in its individual membership. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.) 6. Entitlement to constitutional guaranties: a. Due process (Albert vs. University Publishing, 13 SCRA 84) b. Equal protection of the law (Smith, Bell & Co. vs. Natividad, 40 Phil. 136) c. Protection against unreasonable searches and seizures. (Stonehill vs. Diokno, 20 SCRA 383) A corporation is not entitled to invoke the right against self-incrimination. (Bataan Shipyard vs. PCGG) BAR OPERATIONS 2011

7. Liability for torts – a corporation is liable whenever a tortuous act is committed by an officer or agent under the express direction or authority of the stockholders or members acting as a body, or, generally, from the directors as the governing body. (PNB vs. CA, 83 SCRA 237) 8. A corporation is not entitled to moral damages because it has no feelings, no emotions, no senses. (ABS-CBN vs. Court of Appeals) 9. Liability for Crimes – since a corporation is a mere legal fiction, it cannot be held liable for a crime committed by its officers, since it does not have the essential element of malice; in such case the responsible officers would be criminally liable. (People vs. Tan Boon Kong, 54 Phil.607) II. Doctrine of Piercing the Corporate Veil 1. Doctrine of Piercing the Corporate Veil (2006 Bar Examination) Under the doctrine of “piercing the veil of corporate entity”, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded and the Page 45

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

corporation will be considered as a mere associations of persons, such that liability will attach directly to the officers and the stockholders (Umali vs. Court of Appeals, 189 SCRA 529, 542 [1990]). It is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. Grounds for Application of the Doctrine (2006 Bar Examination) The doctrine of “piercing the veil of corporate entity” will apply when the corporation’s separate juridical personality is used: 1. to defeat public convenience; 2. to justify wrong, protect fraud, or defend crime; 3. as a shield to confuse the legitimate issue; 4. where the corporation is the mere alter ego or business conduit of a person; or 5. where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation BAR OPERATIONS 2011

(Umali vs. Court of Appeals, 189 SCRA 529, 542 [1990]). Test in Determining Whether to Pierce the Veil of Corporate Personality 1. Control, not mere majority or complete stock control, but complete domination, not only of the finances, but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; 3. The aforesaid control and breach of duty must proximately prevent “piercing the corporate veil”; 4. The wrong – doing must be clearly and convincingly established. It cannot be presumed. (Lim vs. Court of Appeals, et al., G.R. No. 124715, January 24, 2000 E. CAPITAL STRUCTURE 1. Number and qualifications of incorporators i. Number of Incorporators (2006 Bar Examination) Page 46

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

Incorporators are required to be not less than five (5) but not more than fifteen (15). ii. Residency requirement (2006 Bar Examination) Majority of the incorporators are required to be residents of the Philippines. iii. Qualifications All incorporators: a. must be natural persons b. must be of legal age 2. Minimum Capital Stock and subscription requirement i. Subscription requirement All incorporators must subscribe to at least one (1) share of stock of the corporation being organized. ii. Capital Stock, minimum subscription The law requires that the total capital stock to be subscribed at the time of incorporation should at least be twenty five percent (25%) of the authorized capital stock of the corporation being organized. 3. Corporate Term Fifty (50) years from the date of incorporation unless sooner dissolved

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or unless said period is extended (Sec. 11). 4. Classification of Shares i. COMMON SHARES are the basic class of stock ordinarily and usually issued without extraordinary rights and privileges. The owners thereof are entitle to a pro rata share in the profits of the corporation and in its assets upon dissolution and, likewise, in the management of its affairs without preference or advantage whatsoever. ii. PREFERRED SHARES are those issued with par value, and preferences either with respect to: a. assets after dissolution (PREFERRED SHARES AS TO ASSETS) b. distribution of dividends (PREFERRED SHARES AS TO DIVIDENDS) c. or both, and other preferences. Kinds of Preferred Shares as to Dividends 1. Cumulative preferred shares – a share which entitles the holder thereof not only the payment of current dividends but also of dividends in arrears. 2. Non – cumulative preferred shares – a share which allows the holder thereof Page 47

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

to the payment of current dividends only without regards to dividends in arrears. 3. Participating preferred shares – a share which gives the holder the right to participate with the holders of the common share in the remaining profits pro rata, aside from the right to receive the stipulated dividends at a preferred rate. 4. Non – participating preferred shares – a share which allows the holder to receive the stipulated dividends at a preferred rate only. The holder shall not share in the dividends distributed to common shares. REDEEMABLE SHARES are those which permit the issuing corporation to redeem or purchase its own shares.  Limitations: i. Redeemable shares may be issued only when expressly provided for in the articles of incorporation; ii. Terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificates of stock BAR OPERATIONS 2011

representing such shares; iii. Redeemable shares may be deprived of voting rights in the articles of incorporation, unless otherwise provided in the Code. iv. Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings (Sec. 8), and provided further that the corporation has, after such redemption, sufficient assets in its books to absorb corporate debts and liabilities. TREASURY SHARES are shares that have been earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation, redemption or through some lawful means (Sec. 9). When treasury shares are sold below its par or issued value, there can be no watering of stock because watering of stock contemplates an original issuance of shares. PAR VALUE SHARES are shares with a value fixed in the certificates of stock and the articles of incorporation. Page 48

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

NO PAR VALUE SHARES are shares having no par value but have an issued value stated in the certificate or articles of incorporation.  Limitations: i. No par value shares can have an issue price of less than Php 5.00; ii. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends; iii. They cannot be issued as preferred stocks; iv. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association; v. The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares; vi. Once issued, they are deemed fully paid and non – assessable (Sec. 6). F. INCORPORATION AND ORGANIZATION 1. Promoter 2. Subscription Contract

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Ways to become a Stockholder of a Corporation: a. Subscription contract with the corporation; b. Purchase or acquisition of shares from existing stockholders; and c. Purchase of treasury shares from the corporation SUBSCRIPTIO N Refers to unissued shares Corporation still to be form or already in existence The subscriber can exercise all his right as a stockholder even before full payment of the subscription

Corporate creditors may proceed against the subscriber for his unpaid subscription in case the corporate asset are not sufficient to satisfy their

PURCHASE OF SHARES Refers to issued shares The corporation is already in existence The purchaser can only exercise his right upon full payment of the purchase price Corporate creditor cannot proceed against the purchaser for the balance of the purchase price Page 49

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

claims

Subscriber may not be legally released from the payment of his unpaid subscription unless no creditors would be prejudiced and all the stockholders agree thereto Subscription may be in any form, not covered by the statute of frauds.

because of the lack of privity of contract between them The corporation can rescind or cancel the contract in case of non – fulfillment by the buyer. Purchase of shares is covered by the statute of frauds in case of purchases amounting to more than Php 500.00

Consequently, the subscribers are not real parties in interest in a case for rescission of the subscription contract of another subscriber because they are not parties thereto. (Ong Yung vs. Tiu, April 06, 2003) Kinds Contract

of

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Subscription

a. Pre– incorporation subscription b. Post – incorporation Subscription c. Conditional Subscription d. Absolute Subscription e. Subscription with a special term 3. Pre – incorporation Subscription Agreements One entered into before incorporation. Pre – incorporation subscription constitutes a binding contract among the subscribers. NOTE: It shall be irrevocable for a period of at least six (6) years from the date of subscription unless: a. All of the other subscribers consent to the revocation, or b. The incorporation fails to materialize It shall likewise be irrevocable after the submission of the articles of incorporation to the SEC. UNDERWRITING AGREEMENT between a corporation and a third person, termed the “underwriter” is an agreement by which the latter agrees, for a certain compensation, to purchase a stipulated amount of stocks or bonds, specified in the underwriting agreement, if Page 50

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

such securities are not purchased by those to whom they are first offered. 4. Consideration of Stocks  Valid considerations in subscription agreement: a. Cash actually received; b. Property, tangible or intangible necessary or convenient for its use and lawful purpose; c. Labor or services actually rendered to the corporation; d. Previously incurred corporate indebtedness (Note: the indebtedness involved must be one that is acknowledged by the board); e. Amounts transferred from unrestricted retained earnings to stated capital; f. Outstanding shares in exchange for stocks in the event of reclassification or conversion. 5. Articles of Incorporation i. Definition: Basic document defining the charter of the corporation ii. Significance: Condition precedent in the acquisition of corporate existence iii. Contractual significance: A contract between 3 parties: (1) the State and the corporation, (2) the BAR OPERATIONS 2011

stockholders and the State, and (3) the corporation and its stockholders. iv. Effects as to Outsiders: Bind a third person dealing with the corporation v. Requisites for Validity a. Filed and registered with the SEC b. Banks, public utilities, insurance companies: needs favorable recommendation from appropriate agency that articles are in accordance with law c. SEC shall examine AOI upon filing and upon satisfaction of all legal requirements, issue certificate of incorporation and only then shall Corporation have a personality separate and distinct from its stockholders or members d. Sworn Statement of the Treasurer regarding subscription requirement vi. Basic Content (Sec. 14) a. The name of the corporation; b. The specific purpose or purposes for which the corporation is being incorporated; c. The place where the principal office of the Page 51

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

d. e.

f.

g.

corporation is to be located, which must be within the Philippines; The term for which the corporation is to exist; The number of directors or trustees, which shall not be less than 5 nor more than 15; The names, nationalities and residences of persons who shall act as director or trustees until the first regular directors or trustees are duly elected and qualified in accordance with the Code; If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares into which it is divided, and in case the share are par value shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated;

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h. If it be a non – stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and i. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. vii. Adoption and Form: File with the Securities and Exchange Commission articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators. viii. Amendment a. Majority vote of BOD / trustees and vote or written assent of 2/3 outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders. b. Amendments take effect upon approval by SEC or from the date of filing with SEC if not acted upon within 6 months from date of filing for a cause not attributable to the corporation. ix. Grounds for Rejection or Disapproval (Sec. 17) a. That the articles of incorporation or any Page 52

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amendment thereto is not substantially in accordance with the from prescribed herein; b. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral or contrary to government rules and regulations; c. That the Treasurer’s Affidavit concerning the amount of capital stock subscribed and / or paid is false; d. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution. 6. Corporate Name The name of the corporation must not be identical or deceptively or confusingly similar to any existing corporation. 7. Registration and issuance of Certificate of Incorporation 8. Election trustees

of

directors

or

9. Adoption of By – Laws i. Definition: Meant to be an intramural document to govern the relationship between and among the BAR OPERATIONS 2011

ii. iii.

iv.

members of a corporate family Effect as to Outsiders: Does not bind outsiders Requisites for Validity a. By – law provisions cannot contravene law b. By – law provisions cannot contravene the charter c. By – laws must be reasonable and cannot discriminate. Basic Content (Sec. 47) a. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; b. The time and manner of calling and conducting regular or special meetings of the stockholders or members; c. The required quorum in meetings of stockholders or members and the manner of voting therein; d. The form for proxies of stockholders and members and the manner of voting them; e. The qualifications, duties and compensation of directors or trustees, officers and employees; f. The time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof; Page 53

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

g. The manner of election or appointment and the term of office of all officers other than directors or trustees; h. The penalties for violation of the by – laws; i. In the case of stock corporations, the manner of issuing stock certificates; and j. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. v. Amendment a. Majority vote of BOD / Trustees and majority vote of outstanding capital stock / members at a regular or special meeting duly called for the purpose of amending or repealing any by – laws or adopting new by – laws b. By delegation of 2/3 outstanding capital stock or members G. CORPORATE POWERS 1. GENERAL POWERS, THEORY OF GENERAL CAPACITY (Sec. 36) a. To sue and be sued; b. Of succession; c. To adopt and use of corporate seal;

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d. To amend its Articles of Incorporation; e. To adopt its by-laws; f. For stock corporations: issue and sell stocks to subscribers and treasury stocks; for nonstock corporations: admit members; g. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and personal property, securities and bonds h. To enter into merger or consolidation; i. To make reasonable donations for public welfare, hospital, charitable, cultural, scientific, civic or similar purposes, provided that no donation is given to any (i) political party, (ii) candidate and (iii) partisan political activity. j. To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees. k. To exercise other powers essential or necessary to carry out its purposes. 2. SPECIFIC POWERS, THEORY OF SEPECIFIC CAPACITY (Sec. 37 – 44) a. Power to extend or shorten corporate term (2000 Bar Examination)  Majority of BOD, 2/3 of capital stock Page 54

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

 Extension – Sec. 37: right of appraisal for dissenting stockholders  Shortening – Sec. 81 allows for right of appraisal, but technically there shouldn’t be because investors are also in it for the short – term (there is no novation) b. Increase or decrease corporate stock  Majority of BOD, 2/3 of capital stock  Needs SEC approval i. Increase – there must be certification of subscription to at least 25% of increased stock, and at least 25% of that amount paid up ii. Decrease – won’t approve if it prejudices corporate creditors.  Since this is not an inherent power, there must be strict compliance with requirements in Sec. 38 and Amendment provisions in Sec. 16  NO right of appraisal i. Increase – would defeat very purpose of raising capital ii. Decrease – there already is return of part of investments  ALSO, investing into a corporation comes with expectations of possible increase / decrease of shares BAR OPERATIONS 2011

Ways of Increasing (Decreasing) Capital Stock 1. By increasing (decreasing) the no. of shares authorized to be issued without increasing (decreasing) the par value thereof 2. By increasing (decreasing) the par value of each share without increasing (decreasing) the no. thereof 3. By increasing (decreasing) both the no. of shares authorized to be issued and the par value thereof (The Corporation Code of the Phil. Annotated by Hector de Leon, 2006 ed) Methods to Replenish Capital 1. Additional subscription to shares of stock of the corporation by stockholders or by investors; 2. Advances by the stockholders to the corporation; or 3. Payment of unpaid subscription by the stockholders. c. Incur, create, or increase bonded indebtedness CORPORATE BOND: an obligation to pay a definite sum of money at a future time at a fixed rate of interest  SEC Opinion (1987): only covers indebtedness of Page 55

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

corporation secured by real / personal property  Majority of BOD, 2/3 of capital stock  Needs SEC approval Corporation must have minimum net worth of P 25M and must have been operating for at least 3 years  Unlike normal indebtedness, which does not require 2/3 approval: i. Usually very large amount ii. Usually with first lien on important assets iii. Usually long period of time  NO right of appraisal i. Would drain financial resources ii. Regardless, corporation’s creditors always have priority over assets d. Sell, dispose, lease, encumber all or substantially all of corporate assets  Majority of BOD, 2/3 capital stock  Enterprise – level transaction: Although there is no effect in relationship between State and Corporation, it’s just as if there is resetting to starting point of business life  Compare:

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i. Usual and regular course of business (Business Judgment Doctrine) ii. Proceeds of sale for conduct of remaining business  The test: It just has to be “ordinary” so the sale of all business of a corporation in light of using proceeds to set – up anew still needs RATIFICATION  When no ratificatory vote from the stockholders / members needed: i. If it is necessary in the usual and regular course of business ii. If the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of the remaining business.  There is right of appraisal because unlike shortening of corporate life, where there is automatic dissolution, here there is none – so stockholders may be stuck in a non – performing venture e. Purchase or acquire own shares provided: i. there is an unrestricted retained earnings to purchase the same and its capital is not thereby impaired; and ii. it is for a legitimate and proper corporate purpose. Page 56

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

Instances when Power may be Exercised 1. To eliminate fractional shares 2. To collect / compromise an indebtedness to the corporation arising from unpaid subscription, in a delinquency sale, and to purchase the shares sold during said sale 3. To pay dissenting / withdrawing stockholders entitled to payment for their shares when exercising appraisal right 4. To decrease cost of doing business by decreasing amount of dividends to be paid in the future 5. Other similar situations since this is non - exclusive f. Invest corporate funds in another corporation or business for other purpose other than primary purpose  May invest in corporation / business organized for any purpose apart from the primary purpose from which the investing business was organized  Majority of BOD + 2/3 vote of stockholders  Sec. 42: When investment is reasonably necessary to accomplish primary purpose: approval of stockholders not necessary BAR OPERATIONS 2011

i. Lies under business judgment doctrine ii. THUS whatever the primary purpose of a corporation, it has a choice of placing funds in deposit accounts, money market, treasury bills, or even stocks of other corporations (fit into power, discretion and purpose to obtain best returns for the corporation)  So in Sec. 42, investment requiring ratificatory vote: when there is management involved of the other company and not just investment per se. g. Power to declare dividends out of unrestricted retained earnings DIVIDENDS: corporate profits set aside, declared and ordered to be paid by the directors for distribution among shareholders at a fixed time. FORMS: 1. Cash 2. Property 3. Stock REQUISITES: 1. Existence of unrestricted retained earnings out of which the dividends may be declared and paid (2005 Bar Examination) Page 57

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

2. A corporate resolution of the board of directors declaring the payment of a portion or all such earnings to the stockholders (The Corporation Code of the Phil. Annotated by Hector de Leon, 2006 ed) GENERAL RULE: Stock corporation cannot retain surplus profits in excess of 100% of paid – up capital stock except: (2001 Bar Examination) 1. Justified by definite corporate expansion projects / programs approved by BOD 2. Loan agreement, where creditor has to first consent before corporation can declare dividends 3. Special circumstances h. Enter into management contract with another corporation (not with an individual or a partnershipwithin general powers) whereby one corporation undertakes to manage all or substantially all of the business of the other corporation for a period not longer than 5 years for any one term. MANAGEMENT CONTRACT: is an agreement whereby a corporation undertakes to manage or operate all or substantially all of the BAR OPERATIONS 2011

business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise (Sec. 44) GENERAL RULE: There shall be no management contract with another corporation unless:  Majority of BOD  Stockholders owning majority shares in BOTH managing and managed corporation EXCEPT where 2/3 votes needed :if a stockholder/s in both managing and managed corporation owns more than 1/3 of outstanding voting capital stock of managing corporation OR majority of BOD in managing corporation is also majority of BOD in managed corporation  The management contract must not be longer than 5 years i. ULTRA VIRES ACTS are acts which are beyond the conferred powers of a corporation or the purposes or objects for which it is created as defined by the law of its organization. (Republic vs. Acoje Mining Co., Inc. 7 SCRAS 361) An act done by a corporation outside of the express and Page 58

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

implied powers vested in it by its charter and by the law. (Bar Review Materials in Commercial Law, Jorge Miravite, 2002 ed.) Types: (Philippine Corporate Law, Cesar Villanueva, 2001 ed.) 1. Acts done beyond the powers of the corporation as provided in the law or its articles of incorporation; 2. Acts or contracts entered into in behalf of a corporation by persons who have no corporate authority (Note: This is technically ultra vires acts of officers and not of the corporation); and 3. Acts or contracts, which are per se illegal as being contrary to law.  An ultra vires act may be that of: a. The corporation; b. The Board of Directors; and c. The corporate officers.  Effects of ultra vires act on: a. Executed contract – courts will not set aside or interfere with such contracts; b. Executory contracts – no enforcement even at the suit of either party (void and unenforceable); c. Part executed and part executory – principle of “no

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unjust enrichment at expense of another” shall apply; and d. Executory contracts apparently authorized but ultra vires – the principle of estoppel shall apply. ULTRA VIRES ILLEGAL ACTS

ACTS

AND

Ultra vires (“beyond powers”) refers only to an act outside or beyond corporate powers, including those that may ostensibly be within such powers but are, by general or special laws, either prohibited or declared illegal. It is in this context that the Code has used the term. ULTRA VIRES ACTS Not necessarily unlawful, but outside the powers of the corporation Can be ratified

ILLEGAL ACTS Unlawful; against law, morals, public policy, and public order

Cannot be ratified Can bind the Cannot bind parties if the parties wholly or partly executed TEST whether or not a corporation may perform an act: consider the logical and necessary relation between the act questioned and the corporate purpose expressed by law or in Page 59

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

the charter. If the act is lawful in itself and not prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those ends in a substantial and not in a remote and fanciful sense. (Montelibano vs. Bacolod-Murcia Milling Co., Inc., 5 SCRA 36) REMEDIES IN CASE OF ULTRA VIRES ACTS 1. State a. Obtain a judgment of forfeiture; or b. The SEC may suspend or revoke the certificate of registration 2. Stockholders a. Injunction; or b. Derivative suit 3. Creditors a. Nullification of contract in fraud of creditors j. DOCTRINE OF INDIVIDUALITY OF SUBSCRIPTION The subscription in shares of stock is one, entire, indivisible, and whole contract, which cannot be divided into portions. (SEC Opinion) k. DOCTRINE OF EQUALITY OF SHARES 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 BAR OPERATIONS 2011

equal and enjoy the same rights and privileges and are also subject to the same liabilities. (Sec. 6) l.

TRUST FUND DOCTRINE (TFD) The subscribed capital stock of the corporation is a trust fund for the payment of 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 creditors may sue the stockholders directly for the latter’s unpaid subscription.  Application of the TFD: 1. Where the corporation has distributed its capital among the stockholders without providing for the payment of creditors; 2. Where it had released the subscribers to the capital stock from their subscriptions; 3. Where it has transferred the corporate property in fraud of its creditors; and 4. Where the corporation is insolvent.  Coverage of the TFD: 1. If the corporation is solvent, the TFD extends to the capital stock represented by the corporation’s legal capital. 2. If the corporation is insolvent, the TFD extends to the capital stock of the corporation as well as all of its property and assets. Page 60

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ



Exceptions to the TFD:

1. Redemption of redeemable shares (Sec. 8) 2. In close corporation, when there should be a deadlock and the SEC orders the payment of the appraised value of the stockholder’s share. (Sec. 104) H. STOCKHOLDERS MEMBERS

AND

RIGHTS OF STOCKHOLDERS (Pandect of Commercial Law and Jurisprudence, Justice Jose Vitug, 1997 ed.) 1. RIGHTS OF A STOCKHOLDER a. Managerial Rights b. Proprietary Rights c. Pre – emptive Rights d. Remedial Rights e. Appraisal Rights f. Inspection Rights 2. MANAGERIAL RIGHTS a. Voting rights; and b. Right to remove directors LIMITATIONS on the stockholder’s RIGHT TO VOTE a. Where the articles of incorporation provides for classification of shares pursuant to Sec. 6, non – voting shares are not entitled to vote except as provided for in the last paragraph of Sec. 6; BAR OPERATIONS 2011

b. Preferred or redeemable shares may be deprived of the right to vote unless otherwise provided in the Code; c Fractional shares of stock cannot be voted; d. Treasury shares have no voting rights as long as they remain in the treasury; e. Holders of stock declared delinquent by the BOD for unpaid subscription are not entitled to vote or to a representation at any stockholder’s meeting; and f. A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the coporation. 3. PROPRIETARY RIGHTS a. Right to dividends; b. Right to issuance of stock certificate for fully paid shares; c. Proportionate participation in the distribution of assets in liquidation; d. Corporate Books and Records inspection rights Limitations: i. The right must be exercised during reasonable hours on business days; ii.The person demanding the right has not improperly used nay information obtained through any previous examination of Page 61

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the books and records of the corporation; and iii. The demand is made in good faith or for a legitimate purpose. (Sec. 74) The right extends, in consonance with equity, good faith, and fair dealing, to a foreign subsidiary wholly-owned by the corporation. Books required to be kept by the corporation: 1. Book of Minutes a. minutes of stockholder or members meetings; and b. minutes of board meetings. 2. Book of all business transactions; 3. Stock and transfer book, in case of stock corporations. Corporate records required by the SEC to be kept and/or registered: 1. Books of Account; 2. List of Stockholders or Members; and 3. Financial Records. e. Appraisal right (2007 Bar Examination) is the right of a stockholder who dissents from a fundamental or extraordinary corporate action to demand payment of the fair value of his shares. The corporate acts involves fundamental changes in the corporate structure namely: BAR OPERATIONS 2011

1. An amendment to the articles of incorporation that has the effect of – 2. Sale, encumbrance or other dispositions of all or substantially all of the corporate property or assets 3. Merger or consolidation 4. Investment of corporate funds in another corporation or in a purpose other than the primary purpose (Sec. 42) GENERAL RULE: A dissenting stockholder who demands payment of his shares is no longer allowed to withdraw from his decision EXCEPT when: 1. The corporation consents to the withdrawal 2. The proposed corporate action is abandoned or rescinded by the corporation 3. The proposed corporate action is disapproved by the SEC where its approval is necessary 4. The Commission determines that such stockholder is not entitled to appraisal right. f. Right to recover stocks unlawfully sold for delinquent payment of subscription g. Preemptive right is the shareholders’ preferential right to subscribe to all issues or dispositions of shares of any class in proportion to their present stockholdings. Page 62

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Purpose: to enable shareholder to retain proportionate control in corporation and to retain equity in the surplus.

the his the his

Extends to treasury shares in case of their reissuance. If the shares preferentially offered to a stockholder are not subscribed or purchased by him, it does not follow that said shares shall again be re-offered on a pro rata basis to stockholders who already exercised their preemptive rights. There is no preemptive right with respect to the share to be re-offered.  In case additional issues of originally authorized shares: GENERAL RULE: There is no preemptive right. This is on the theory that when a corporation at its inception offers its first shares, it is presumed to have offered all of those which it is authorized to issue. EXCEPTION: When a corporation at its inception offers only a specified portion of its authorized capital stock for subscription. If subsequently, it offers the remaining unsubscribed portion, there would be preemptive right as to the remaining portion thus offered for subscription. BAR OPERATIONS 2011

 When pre-emptive right not available: a. When denied by the article of incorporation b. Shares requiring stock offering or minimum stock ownership by the public c. Shares to be issued in good faith with the approval of the 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 PRE-EMPTIVE RIGHT vis – a vis RIGHT OF FIRST REFUSAL (Philippine Corporate Law, Cesar Villanueva, 2001 ed.) PREEMPTIVE RIGHT May be exercised even when there is no express provision of law

Pertains to unsubscribed portion of the authorized capital stock. A right that may be claimed

RIGHT OF FIRST REFUSAL Arises only by virtue of contractual stipulations but is also granted under the provisions on Close Corporation Exercisable against another stockholder of the corporation of his shares of stock Page 63

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

against the corporation 4. REMEDIAL RIGHTS a. Individual suit – a suit instituted by a shareholder for his own behalf against the corporation; b. Representative suit – a suit filed by a shareholder in his behalf and in behalf likewise of other stockholders similarly situated and with a common cause against the corporation; and c. Derivative suit (2009, 2006, 2005, 2004 Bar Examination) – a suit filed in behalf of the corporation by its shareholders (not creditors whose remedies are merely subsidiary such as accion subrogatoria and accion pauliana) upon a cause of action belonging to the corporation, but not duly pursued by it, against any person or against the directors, officers and/or controlling shareholders of the corporation. Requisites: i. An existing cause of action in favor of the corporation ii. The stockholder/member must first make a demand upon the corporation or the management to sue BAR OPERATIONS 2011

unless such a demand would be futile iii. The stockholder/member must be such at the time of the objectionable acts or transactions unless the transactions are continuously injurious iv. The action must be brought in the name of the corporation The number of shares of the stockholder is immaterial since he is not suing in his own behalf Note: The mere trustee of shares registered in his name cannot file a derivative suit for he is not a stockholder in his own right. (Bitong vs. CA, 292 SCRA 304) 5. LIABILITIES OF STOCKHOLDERS a. Liability to the corporation for unpaid subscription b. Liability to the corporation for interest on unpaid subscription c. Liability to creditors of the corporation on the unpaid subscription d. Liability for watered stock e. Liability for dividends unlawfully paid f. Liability for failure to create corporation Page 64

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

6. STOCKHOLDERS MEMBERS MEETING

OR

WHEN: 1. REGULAR - held on the date fixed in the by-laws or if not fixed on any date in April; and 2. SPECIAL - held at any time deemed necessary or as so provided in the by-laws. WHERE: WHERE: In the city or municipality where the principal office of the corporation is located, and if practicable, in the principal office of the corporation. However, in the case of non-stock corporations, the by-laws may provide that meetings may be held at any place even outside the principal place of the corporation. (Sec. 93) I. BOARD OF TRUSTEES

DIRECTORS

/

1. BOARD OF DIRECTORS OR TRUSTEES AS REPOSITORY OF CORPORATE POWERS GENERAL RULE: The corporate powers of the corporation shall be exercised, all business conducted and all property of such corporation controlled and held by the board of directors or trustees. (Sec. 23) BAR OPERATIONS 2011

EXCEPTIONS: 1. In case of an Executive Committee duly authorized in the by-laws; 2. In case of a contracted manager which may be an individual, a partnership, or another corporation. Note: In case the contracted manager is another corporation, the special rule in Sec. 44 applies. 3. In case of close corporations, the stockholders may manage the business of the corporation instead by a board of directors, if the articles of incorporation so provide. The power to purchase real property is vested in the board of directors or trustees. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the board, whose approval will finalize the transaction. A corporation can only exercise its powers and transact its business through its board of directors and through its officers and agents when authorized by a board resolution or by its by-laws. (Spouses Constantine Firme vs. Bukal Enterprises and Development Corporation, G.R. No. 146608, October, 23, 2003)

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LIMITATIONS ON POWERS OF BOARD OR DIRECTORS/TRUSTEES 1. Limitations imposed by the Constitution, statutes, articles of incorporation or by-laws. 2. Cannot perform constituent or those involving fundamental changes in the corporation requiring the approval of stockholders or members. 3. Cannot exercise powers not possessed by the corporation. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.) NATURE OF POWERS OF BOARD OF DIRECTORS/TRUSTEES (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.) a. Under the Theory of Original Power, the powers of the board of directors or trustees are ORIGINAL and UNDELEGATED. The stockholders or members do not confer, nor can they revoke those powers. b. They are DERIVATIVE only in the sense of being received from the State in the act of incorporation. 2. TENURE, QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS

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 Qualifications: 1. For a stock corporation, ownership of at least 1 share capital stock of the corporation in his own name, and if he ceases to own at least one share in his own name, he automatically ceases to be a director. (Sec. 23) For a non-stock corporation, only members of the corporation can be elected to seat in the Board of Trustees. In order to be eligible as a director, what is material is the legal title to, not beneficial ownership of the stocks appearing on the books of the corporation 2. A majority of the directors/trustees must be residents of the Philippines. (Sec. 23) 3. He must not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years or a violation of the Corporation Code, committed within five years from the date of his election. (Sec. 27) 4. Only natural persons can be elected directors/trustees. In case of corporate stockholders or members, their representation in the board can be achieved by making their individual Page 66

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

representatives trustees of the shares or membership to make them stockholders/members of record. 5. Other qualifications as may be prescribed in the by-laws of the corporation. 6. Must be of legal age  Disqualifications Directors, Trustees Officers

of or

1. Conviction by final judgment of offenses punishable by imprisonment for excess of 6 years, or 2. Violation of code committed within 5 years prior to date of his election or appointment.  Terms of Directors For 1 year or until their successors are elected and qualified (Hold – over Principle) 3. ELECTION OF DIRECTORS OR TRUSTEES a. Quorum in Meeting for Election  Majority of the outstanding capital stock or member entitled to vote  Present either in person or by representative by WRITTEN PROXY b. How  Viva Voce, or

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 By ballot if requested by any voting stockholder or member c. Stock Corporations Methods of Voting on the Election of Directors g. STRAIGHT VOTING – Every stockholder through this method, may vote such number of shares for as many persons as there are directors. h. CUMULATIVE VOTING i. Every stockholder is entitled to such number of votes that his number of shares multiplied by the total number of directors to be elected will bring. He may give all such votes to one candidate (CUMULATIVE VOTING FOR ONE CANDIDATE) or he may distribute them among as many candidates as he sees fit (CUMULATIVE VOTING BY DISTRIBUTION). (Sec. 24) ii. A minority director elected through cumulative voting cannot be removed without cause. (Sec. 28) iii. A PROXY is a written instrument, signed by the stockholder or member (as principal) and filed before the scheduled meeting with the corporate secretary, and given to another person Page 67

GREEN NOTES IN COMMERCIAL LAW Prepared by: ATTY. RENATO S. RONDEZ

(as agent) authorizing such person to exercise the voting rights of the former. What is the period of validity of proxy? Unless otherwise provided in the proxy, it should be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a longer period than five years at any one time. (Sec. 58) Instances whereby Right to vote by Proxy may be exercised: 1. Election of the board of directors or trustees; 2. Voting in case of joint ownership of stock; 3. Voting by trustee under voting trust agreement; 4. Pledge or mortgage of shares; 5. As provided for in it’s by – laws. Stockholders or members may attend and vote in their meeting by proxy (Sec. 58); but directors cannot do so. Directors must always act in person. (Sec. 25) A VOTING TRUST 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 rights) over such shares; and in return, trust BAR OPERATIONS 2011

certificates are given to the stockholder/s, which are transferrable like stock certificates, subject however, to the trust agreement. d. Non – Stock Corporations  Members may cast as many votes as there are trustees to be elected (seats)  But may not cast more than one vote for a single candidate  EXCEPT: when the AOI or by – laws provide otherwise e. Adjournment of Meeting for Elections  May adjourn from day to day or from time to time  But NOT sine die or indefinitely if quorum is not met (majority of stockholders or members are not present). NOTE: Proposed amendment to by – laws stipulating permanent director even without election is contrary to law. (Grace Christian High School vs. CA) 4. REMOVAL OF DIRECTORS OR TRUSTEES a. How may be removed i. 2/3 vote of stockholders or members entitled to vote ii. During a regular meeting or a special meeting called by the secretary upon: Page 68

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 Order of the President  Written demand from majority of stockholders or members entitled to vote iii. Upon previous notice to stockholders or members  Of the intention to propose such removal at the meeting  Of the time and place of meeting  Must be given by publication or by written notice prescribed in the Code. b. If secretary refuses/ fails to call for the special meeting or give the notice, or there is no secretary, call may be directly addressed to stockholders or members by demanding stockholder or member. c. Causes for Removal 1. May be with or without cause  Cause is usually related to the 3 duties of an officer or director – a. loyalty b. obedience c. diligence 2. Provided that removal without cause may not be used to deprive minority stockholders or members of their right of representation under Sec. 24. BAR OPERATIONS 2011

NOTE: Removal of Board of Director or Trustee is different from removal of a corporate officer. Stockholder’s approval is necessary only for the removal of the members of the Board. For the removal of a corporate officer or employee, the vote of the Board of Directors is sufficient for the purpose. (2001 Bar Examination) 5. FILLING OV VACANCIES IN THE OFFICE OF DIRECTOR OR TRUSTEE a. Ground for Removal 1. Removal by the stockholder or members or upon expiration of term  Vacancy shall be filled by the stockholder in a regular or special meeting called for that purpose. 2. Other causes other than expiration or removal by stockholders / members.  If remaining directors constitute Quorum – may be filled by the MAJORITY vote of the remaining directors.  If no quorum – filled by the stockholders in a regular or special meeting called for that purpose. 3. Proposed amendment of Articles of Incorporation resulting in increase in number of directors / trustees Page 69

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 Vacancy shall be filled by the stockholders in a regular or special meeting called for that purpose  Or in the same meeting authorizing increase of directors or trustees if so stated in notice of the meeting b. Director or trustee so elected shall serve only the unexpired portion of the term. 6. COMPENSATION Directors are not entitled to compensation as such directors except that they are allowed reasonable per diems. However, directors may be given compensation when: a. There is a provision in the by – laws authorizing payment of compensation; or b. By a vote of the Stockholders representing at least majority of the outstanding capital stock at a regular or special meeting. LIMIT: In either case, the total yearly compensation of the directors shall not exceed 10% of the net income before income tax of the corporation during the preceding year. 7. DUTY OF LOYALTY To Act according to the corporation’s best interest BAR OPERATIONS 2011

DOCTRINE OF CORPORATE OPPORTUNIT Y Cover same subject which is business opportunity Applicable to directors, trustees and officers

DISLOYALTY OF A DIRECTOR Cover same subject which is business opportunity Only applicable to DIRECTORS and not to officers Allows RATIFICATIO N of a transaction by a self – dealing director by the vote of stockholders representing 2/3 of the outstanding capital stock.

Does not cover ratification. Even if 99% of the stockholders affirm the transactions, the remaining stockholders can still oppose such a self – dealing transaction and file a derivative suit Applies to both Applies only stock and non to stock – stock corporations corporations 8. BUSINESS JUDGMENT RULE Business judgment rule exists to protect and promote the full and free exercise of managerial power granted to directors. The rule is a “a presumption that in making a business decision, the Page 70

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directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.” (Smith vs. Van Gorkam) 9. DUTY OF DILIGENCE a. Violations of Duty of Diligence i. Willfully and knowingly vote for or assent to patently unlawful acts of the corporation ii. Guilty of gross negligence or bad faith in directing the affairs of the corporation iii. Acquire any personal or pecuniary interest in conflict with their duty as director or trustee iv. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (Tramat Mercantile Inc. vs CA) v. He agrees to hold himself personally and solidarily liable with the corporation; or (Tramat Mercantile Inc. vs. CA) vi. He is made, by specific provision of law, to personally answer for his

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corporate action (Tramat Mercantile Inc. vs. CA) b. Liability for Violation of Duty of Diligence shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. 10. LIABILITY FOR WATERED STOCK Under Sec. 65 on Liability of Directors for Watered Stocks, if director of officer:  Consents to issuance of stocks for a consideration less than its par or issued value;  Consents to payment in consideration other than cash, which is valued in excess of its fair market value;  Having knowledge hereof does not object in writing and file the same with the corporate secretary. Such director or officer shall be SOLIDARILY LIABLE with the stockholder concerned (buyer) and its creditors for the DIFFERENCE between the fair value received at time of issuance of the stock and its par or issued value. 11. CONTRACTS

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a.

By self – dealing directors with the corporation Contracts between the corporation and one or more of its directors or trustees or officers are VOIDABLE at the option of the corporation but VALID if the following are present: i. Presence of director / trustee in the board meeting which approved contract was not necessary to constitute a quorum. ii. Vote of director or trustee not necessary for approval of contract iii. Contract is fair and reasonable under the circumstances iv. In case of an officer, contract has been previously authorized by board of directors. NOTE: If director’s presence was required to meet the quorum (1st requisite) and I his vote was necessary for approval of the contract (2nd requisite), the contract may still be valid if it is RATIFIED by 2/3 of stockholders or members in a meeting called for that purpose.

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b.

Between corporation with interlocking directors  Contract between two or more corporations with a common director/s may be valid  However, to be valid, it must be fair and reasonable  A contract between the corporations with interlocking directors is VOID if there is fraud  If the interest of the interlocking director in one corporation is SUBSTANTIAL (meaning stockholdings exceed 20% of the outstanding capital stock) and his interest is merely NOMINAL, contract shall be treated as under the provisions of Self – Dealings (voidable but may be ratified), insofar as the corporation where he has a nominal interest is concerned. NOTE: Corporate officers are not permitted to use their position of trust and confidence to further their private interests. The doctrine of CORPORATE OPPORTUNITY is precisely recognition by the courts that the fiduciary standards could not be upheld where the fiduciary was acting for two entities with competing interest. (Gokongwei Jr. vs. SEC) Page 72

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12. EXECUTIVE COMMITTEE a. Creation A body created by the bylaws and composed of some members of the board which, subject to the statutory limitations, has all the authority of the board to the extent provided in the board resolution or by-laws. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.) Must be provided for in the bylaws and composed of not less than 3 members of the board appointed by the board. May act by a majority vote of all of its members b. Limitations on its powers It cannot act on the following: 1. Matters needing stockholder approval; 2. Filling up of board vacancies; 3. Amendment, repeal or adoption of by-laws; 4. Amendment or repeal of any resolution of the Board which by its express terms is not amendable or repealable; and 5. Cash dividend declaration. 13. MEETINGS BOARD MEETING (Sec. 53) WHEN: BAR OPERATIONS 2011

1. REGULAR - held monthly, unless otherwise provided in the by-laws; and 2. SPECIAL - held at any time upon the call of the president. WHERE: May be held anywhere in or outside of the Philippines. CORPORATE OFFICERS, QUORUM a. Corporate Officers  President – must be a director  Treasurer – may or may not be a director  Secretary – shall be a resident and a citizen of the Philippines  Other officers provided in the by – laws b. Any 2 or more positions may be held concurrently except president and secretary or president and treasurer c. When elected: Immediately after election of directors d. Duties to be performed by officers  Enjoined on them by law  Enjoined by corporate by – laws e. Quorum – board must act as a body  For transaction of corporate business – majority of number of

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directors or trustees as fixed in the AOI  For corporate act to be valid, there must be a quorum and the act must be approved by majority of directors or trustees PRESENT  For election of officers – majority of ALL members of the board of directors or board of trustees, whether all members are present or not. f. Director or Trustees cannot ATTEND or VOTE by proxy at board meetings. POWERS OF CORPORATE OFFICERS a. Rule on Corporate Officer’s power to bind the corporation  An officer’s power as an agent of the corporation must be sought from the statute, charter, by – laws or in a delegation of authority from such officer, from the acts of the board of directors formally expressed or implied from a habit or custom of doing business b. When Corporation bound by the act of its President. In the absence of a charter or by – law provision to the contrary, the president is presumed to have the authority to act within the BAR OPERATIONS 2011

domain of the general objectives of its business and within the scope of his or her usual duties. A party dealing with the President of a corporation is entitled to assume that he has the authority to enter, on behalf of the corporation, into contract that are within the scope of the powers of said corporation and that do not violate any statute or rule on public policy. Distinctions between a Corporate Officer and Corporate Employee CORPORATE OFFICER Position is provided for in the by – laws or under the Corporation Code RTC has jurisdiction in case of LABOR DISPUTE

CORPORATE EMPLOYEE Employed by the action of the managing officer of the corporation NLRC has jurisdiction in case of labor dispute

J. CAPITAL AFFAIRS 2. CERTIFICATE OF STOCKS The document evidencing the ownership of shares of stocks by a Page 74

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stockholder and the full payment of its issue or subscription price. a. Nature of the certificate It is not essential to the ownership and/or existence of the share of stock. Where the certificate of stock reflects a greater volume of shares than the actual number of shares issued or to be issued, the following rules may be considered: 1. To the extent that there is an over issue, the excess issuance (over the authorized capital stock or the stated capital) shall be void as being ultra vires. 2. If there is no over issue, but no payment has been made to cover the par or stated value of the excess shares, the latter would constitute “watered” stocks. 3. If there is no over issue and watering of stocks, the corporation may be bound to honor the certificate (if duly signed and released by its authorized officers) in the hands of a holder in good faith, reserving a right of recourse that an aggrieved party may pursue against the culpable or unjustly enriched party. CAPITAL STOCK

SHARES OF STOCK

Amount paid in Interest BAR OPERATIONS 2011

or

or secured to be paid in by the stockholders upon which the corporation is to conduct its operation. It is the property of the corporation itself (monetary value).

right which the stockholder has in the management of the corporation, and its surplus profits, and upon a dissolution, in all of its assets remaining after payment of corporate debts.

SHARES OF STOCK Unit of interest in a corporation

CERTIFICATE OF STOCK Evidence of the holder’s ownership of the stock and of his right as a shareholder Incorporeal or Concrete and intangible tangible property May be issued May be issued by the only if the corporation subscription is even if the fully paid. subscription is not fully paid. b. Negotiability Page 75

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REQUIREMENTS FOR TRANSFER OF STOCK a. In case of shares covered by a certificate, the indorsement of the owner or his agent coupled with delivery is essential b. Where no certificate has been issued or for some reason it is not in the possession of the stockholder, it may be transferred by means of a deed of assignment duly recorded in the books of the corporation c. To be valid against the corporation and third persons, the transfer must be recorded in the stock and transfer book d. The transferee must present the indorsed certificate to the corporate secretary who shall effect the transfer in the corporate books, issue a new stock certificate in favor of the transferee and cancel the former certificate. Only absolute transfers need be registered. The pledge or mortgage itself need not be recorded in the stock and transfer book, but a chattel mortgage must comply with the Chattel Mortgage Law, and a pledge would require the shares to be placed in the possession of the creditor/pledgee. The agreement BAR OPERATIONS 2011

must appear in a public instrument to take effect against third persons. (Chemphil vs. CA, 251 SCRA 257) EFFECTS OF UNREGISTERED TRANSFER OF SHARES a. It is valid and binding as between the transferor and the transferee b. It is invalid as to the corporation except when notice is given to the corporation for purposes of registration c. It is invalid as against corporate creditors and the transferor is still liable to the corporation d. It is invalid as to the attaching or executing creditors of the transferor, as well as subsequent purchasers in good faith without notice of the transfer. c. ISSUANCE OF CERTIFICATE OF STOCK No certificate of stock shall be issued until the full amount of the subscription is paid. Basis: Doctrine of Individuality of Subscription D. PROCEDURE FOR ISSUANCE OF NEW CERTIFICATE OF STOCK IN LIEU OF LOST, STOLEN OR DESTROYED ONES (Sec. 73) 1. Filing with the corporation an affidavit in triplicate by the registered owner setting forth the Page 76

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circumstances as to how the certificate was lost, stolen or destroyed, the number of shares, serial number of the certificate and the name of the corporation that issued the same. 2. Publication of notice of loss by the corporation in a newspaper of general circulation in the place of the principal office, once a week for 3 consecutive weeks. 3. After the lapse of 1 year from the date of the last publication, if no contest has been presented, the corporation shall cancel in its books the certificate of stock, which has been lost, stolen or destroyed, and issue in lieu thereof a new certificate of stock. However, if the registered owner files a bond or other securities as may be necessary to the board, the new certificate of stock may be issued even before the expiration of one (1) year period. The prescribed procedure does not apply to a case where the certificates are in the company’s possession when mislaid which thereby obligates the corporation, not the stockholder, to suffer the consequences. (SEC Opinion) 3. WATERED STOCKS Watered stock is stock issued not in exchange for its equivalent in cash, property, shares, stock dividends or BAR OPERATIONS 2011

services. It includes stock that is issued (a) without consideration (b) issued as fully paid when the corporation receives a sum less than par or issued value (c) issued for a consideration other than cash, the fair valuation of which is less than par or issued value (d) stock dividend without sufficient retained earnings or surplus. 3. COLLECTION OF UNPAID SUBSCRIPTION 1. Voluntary payment a. Upon the date specified in the subscription contract b. Upon call by the Board of Directors 2. Involuntary payment a. Extra-judicial i. Delinquency sale ii. Application of dividends b. Judicial action Note: The prescriptive period in case of subscription of shares begins to run only from the time the board of directors declares that the balance are due and payable. It does not begin to run from the date of the subscription. (Garcia vs. Suarez, 67 Phil. 441) 4. SALE OF SHARES

DELINQUENT

1. If the subscription contract fixes the date for payment, failure to pay on such date shall render the entire balance due and payable with interest. Thirty days therefrom, if still Page 77

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unpaid, the shares become delinquent, as of the due date, and subject to sale, unless the board declares otherwise. 2. If no date is fixed in the subscription contract, the board of directors can make the call for payment, and specify the due date. The notice of call is mandatory. The failure to pay on such date shall render the entire balance due and payable with interest. Thirty days therefrom, if still unpaid, the shares become delinquent, as of the date of call, and subject to sale, unless the board declares otherwise. (Sec. 67) A. Effect of Delinquency: A. Upon the stockholder 1. Accelerates the entire amount of the unpaid subscription; 2. Subjects the shares to interest, expenses and costs; 3. Disenfranchises the shares from any right that inheres to a shareholder, except the right to dividends (but which shall be applied to any amount due on said shares or, in the case of stock dividends, to be withheld by the corporation until full payment of the delinquent shares. (Sec. 43) B. Upon the director owning delinquent shares 1. He can continue serving in that capacity unless and until said BAR OPERATIONS 2011

shares are totally bidded away, he continues to be the owner thereof and in the interim he is not disqualified. 2. A delinquent stockholder seeking to be elected as director may not be a candidate for, nor be duly elected to, the board. No delinquency stock shall be voted for or be entitled to vote or representation at any stockholders meeting, nor shall the holder be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code until and unless he pays the amount due on his subscription with accrued interest, and the cost and expenses of advertisement, if any. (Sec. 71) PROCEDURE FOR THE SALE OF DELINQUENT STOCKS (Sec. 68) Call by resolution demanding payment of the balance. However, if the contract of subscription prescribes the date of payment, no call is necessary. Notice of the board resolution given to the stockholders by the corporate secretary, either personally or by registered mail. Publication of notice of call is not required. Failure of the stockholder to pay within a grace period of 30 days from the date specified in the contract of subscription or Page 78

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in the call, the stocks shall be declared delinquent and shall be subject to sale. Notice of delinquency served on the subscribers either personally or registered mail and publication in a newspaper of general circulation in the province or the city where principal office is located for once a week for 2 consecutive weeks. Notice shall state the amount due on each subscription plus accrued interest, and the date, time and place of the sale which shall not be less than 30 days nor more than 60 days from the date the stocks become delinquent. Sale of the delinquent shares at public auction. HIGHEST BIDDER IN A DELINQUENCY SALE a. The person participating in the delinquency sale who offers to pay the full amount of the balance of the subscription together with the accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares. In other words, the amount of the bid does not vary but only the number of shares to be bought changes and determines the highest bidder. b. If there is no bidder as mentioned above, the corporation may bid for the same, and the total amount due shall be credited as paid in full in the books of the BAR OPERATIONS 2011

corporation. Such shares shall be considered as treasury shares. K. DISSOLUTION AND WINDING UP (LIQUIDATION) 1.DISSOLUTION When the corporation ceases to be a juridical person METHODS: (Sec 117) 1. Voluntary 2. Involuntary A corporation may be dissolved by the SEC upon filing of a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations (Sec. 121) The 3 Methods by which a Stock Corporation may be voluntarily Dissolve are: (2002 Bar Examination) 1. Voluntary dissolution where no creditors are affected. This is done by a majority vote of the directors and resolution vote of at least 2/3 vote of the stockholders, submitted to the SEC. 2. Voluntary dissolution where creditors are affected. This is done by a petition for dissolution which must be filed with the SEC, signed by a majority of the members of the board of directors, verified by the Page 79

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president or the secretary, and upon affirmative vote of stockholders representing 2/3 of the outstanding capital stock 3. Dissolution by shortening of the corporate term. This is done by amendment of the articles of incorporation. When Corporation is Deemed Dissolved: WHEN METHOD DEEMED DISSOLVED Sec. 118, Upon issuance when no of certificate of creditors are SEC affected Sec. 119, When where judgment is creditors are rendered affected dissolving the corporation Sec. 120, Upon approval dissolution of the amended by articles of shortening incorporation corporate or the term expiration of the shortened term, as the case may be. INVOLUNTARY DISSOLUTION Grounds: 1. If the corporation does not formally organize and commence the transaction of its business or the construction BAR OPERATIONS 2011

2.

3.

4. 5.

6.

7.

of its works within 2 years from the date of its incorporation, its corporate power ceases and the corporation shall be deemed dissolved. If the corporation has commenced the transaction of its business; but subsequently becomes continuously inoperative for a period of at least 5 years, the same shall be a ground for suspension or revocation of its corporate franchise or certificate of incorporation. When the corporation fails to adopt and file a code of by – laws in the manner provided for by the law. When the corporation has offended against a provision of law for its creation or renewal. When it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges, or franchises. When it has misused a right, privilege, or franchise conferred upon it by law, or when it has exercised a right, privilege or franchise in contravention of law, such as commission by the corporation of ultra vires or illegal acts. When on the basis of findings and recommendations of a duly appointed management committee or rehabilitation receiver, or based on the SEC’s own findings, the continuance of the business of the Page 80

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corporation would not be feasible or profitable nor work to the best interest of the stockholders, parties – litigants, creditors or the general public. 8. When the corporation is guilty of fraud in procuring its certificate of registration. 9. When the corporation is guilty of serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public. 10. Refusal of the corporation to comply or defiance of any lawful order of the SEC restraining commission of acts which would amount to a grave violation of its franchise and 11. Failure of the corporation to file required reports in appropriate forms as determined by the SEC within the prescribed period. EFFECTS OF DISSOLUTION a. Transfer of legal title to corporate property to the stockholders who become coowners thereof b. Corporation ceases as a body politic to continue the business for which it was organized c. It cannot be revived d. Dissolution does not by itself imply the diminution or extinguishment of rights

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e. The corporation continues as a body corporate for 3 years for purposes of winding up f. Cessation of corporate existence for all purposes upon the expiration of the winding up period of 3 years. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed. 2. LIQUIDATION The process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance, if any, is to be distributed to the stockholders or members. Methods: 1. By the corporation itself through its board of directors/trustees; 2. By a trustee to whom the corporate assets have been conveyed; and 3. By a management committee or rehabilitation receiver appointed by the SEC. Note: The 3-year period of liquidation does not apply to Methods 2 and 3 as long as the trustee or the receiver is appointed within the said period. The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the rights and liabilities of such entity nor those Page 81

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of its owners and creditors alike (Sec. 145). The word “trustee” as sued in the corporation statute must be understood in its general concept which could include the counsel to whom was entrusted the prosecution of the suit filed by the corporation. (Spouses Gelano vs. CA) LIQUIDATIO N Connotes a winding up or settling with creditors and debtors Winding up process so that assets may be distributed to those entitled

REHABILITAT ION Connotes a reopening or reorganization Contemplates a continuance of corporate life in an effort to restore the corporation to its former successful operation

OTHER COPORATIONS 1. CLOSE CORPORATION A special kind of stock corporation: 1. whose articles of incorporation should provide that: a. the number of stockholders shall not exceed 20; b. issued stocks are subject to transfer restrictions, with a right of preemption in favor of the BAR OPERATIONS 2011

stockholders or the corporation; and c. the corporation shall not be listed in the stock exchange or its stocks should not be publicly offered; AND 2. Whose at least 2/3 of the voting stocks or voting rights should not be owned or controlled by another corporation which is not a close corporation. (Sec. 96) Characteristics: 1. Stockholders may act as directors without need of election and therefore are liable as directors; 2. Stockholders who are involved in the management of the corporation are liable in the same manner as directors are. 3. Quorum may be greater than mere majority; 4. Transfers of stocks to others, which would increase the number of stockholders to more than the maximum are invalid; 5. Corporate actuations may be binding even without a formal board meeting, if the stockholder had knowledge or ratified the informal action of the others; 6. Preemptive right extends to all stock issues; 7. Deadlocks in board are settled by the SEC, on the written petition by any stockholder; and Page 82

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8. Stockholder may withdraw and avail of his right of appraisal. Note: Special rules are provided for close corporations because it is essentially an incorporated partnership. (The Corporation Code of the Philippines Annotated, Hector de Leon, 2002 ed.) The following cannot be a close corporation: a. mining companies; b. oil companies; c. stock exchanges; d. banks; e. insurance companies; f. public utilities; g. education institutions; h. other corporations declared to be vested with public interest. (Sec. 96)

ORDINARY STOCK CORPORATI ON Its articles of incorporatio n need only contain the general matters enumerated in Sec. 14 of the Code.

CLOSE CORPORATIO N Its articles must contain the special matters prescribed by Sec. 97, aside from the general matters in Sec.

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Its status as an ordinary stock corporation is not affected by the ownership of its voting stock or voting rights. Its articles cannot classify its directors. Business of the corporation is managed by the board of directors.

The corporate officers and employees are elected by a majority vote of all the members of the board of directors.

14. Failure to do so precludes a de jure close corporation status. 2/3 of its voting stock or voting rights must not be owned or controlled by another corporation which is not a close corporation. Its articles may classify its directors. Business of the corporation may be managed by the stockholders if the articles so provide, but they are liable as directors. Its articles may provide that any or all of the corporate officers or employees may be elected or appointed by the stockholders. Page 83

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The preemptive right is subject to the exceptions found in Sec. 39. The appraisal right may be exercised by a stockholder only in the cases provided in Secs. 81 and 42 of the Code. Except as regards redeemable shares, the purchase by the corporation of its own stock must always be made from the unrestricted retained earnings.

Arbitration of intracorporate deadlock by the SEC is not a remedy in case the

The preemptive right is subject to no exceptions unless denied in the articles The appraisal right may be exercised and compelled against the corporation by a stockholder for any reason. In case of an arbitration of an intracorporate deadlock by the SEC, the corporation may be ordered to purchase its own shares from the stockholders regardless of the availability of unrestricted retained earnings. Arbitration of intracorporate deadlock by the SEC is an available remedy in case

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directors or stockholders are so divided respecting the management of the corporation.

the directors or stockholders are so divided respecting the management of the corporation.

POWERS OF THE SEC IN CASE OF DEADLOCK IN CLOSE CORPORATIONS 1. Cancel or alter any provision in the articles of incorporation or bylaws 2. Cancel, alter or enjoin any resolution of the corporation 3. Direct or prohibit any act of the corporation 4. Require the purchase at their fair value of shares of any stockholder either by any stockholder or by the corporation regardless of the availability of unrestricted retained earnings. 5. Appoint a provisional director 6. Dissolve the corporation 7. Granting such other relief as the circumstances may warrant. 2. NON – STOCK CORPORATIONS A corporation organized for an eleemosynary purpose, and no part of whose income is, during its existence, distributable as dividends to its members, trustees, or officers, subject to the Page 84

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provisions of the Corporation Code on dissolution. (Sec. 87) Any profit which it may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which it was organized.

the asset of the non-stock corporation would now be treated as payment to the subscriptions of the members who will now become stockholders of the corporation.

Eleemosynary purposes: charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural. (Sec. 88) They are governed by the same rules established for stock corporations, whenever pertinent, subject, however, to a number of special features.

1. To be entitled to 1 vote unless otherwise provided in the articles or by-laws 2. To vote by proxy unless otherwise provided in the articles or by-laws 3. To transfer membership if allowed by the articles or by-laws 4. To be elected as trustee

RULES ON CONVERSION (SEC Opinion) 1. Stock to non-stock corporation Conversion may be made by mere amendment of the articles of incorporation. 2. Non-stock to stock corporation The corporation must first be dissolved; mere amendment of the articles of incorporation would not suffice because the conversion would change the corporate nature from non-profit to monetary gain. The conversion without dissolving it first would be tantamount to distribution of its assets or income to its members inasmuch as after its conversion, BAR OPERATIONS 2011

RIGHTS OF MEMBERS

STOCK Has capital stock divided into shares and with authority to distribute dividends to its stockholders Stockholders may transfer their shares

NON-STOCK Does not have shares and may not distribute profits to its members

Members cannot transfer their membership unless allowed by the articles or by-laws Cumulative Cumulative voting is voting not available in available the election unless Page 85

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of directors

otherwise provided in the articles or by-laws Directors Trustees may cannot exceed 15 in exceed 15 in number number The term of a The term of a director is 1 trustee is 3 year years; 1/3 of the Board shall be elected annually Stockholders Members may may vote by be deprived of proxy the right to vote by proxy in the articles or by-laws Officers are Officers may elected by the be directly Board of elected by the Directors members unless otherwise provided in the articles or by-laws Stockholders Members may and directors be allowed by must act in a the by-laws to meeting, vote by mail except where or other a mere similar means written assent is sufficient or a formal meeting unnecessary BAR OPERATIONS 2011

RULES FOR DISTRIBUTION OF ASSETS IN CASE OF DISSOLUTION (SEC. 94) 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged or adequate provision shall be made therefor 2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of dissolution, shall be returned, transferred or conveyed in accordance with such requirements 3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes but not held upon a condition requiring return, transfer or conveyance by reason of dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation pursuant to a plan of distribution 4. Other assets, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not Page 86

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organized for profit, as may be specified in a plan of distribution.  The plan of distribution shall be approved by a majority vote of the board of trustees and by 2/3 of the members having voting rights at a meeting SPECIAL CORPORATIONS 1. EDUCATIONAL CORPORATION A stock or non-stock corporation organized to provide facilities for teaching or instruction. A favorable recommendation of the DECS is essential for the approval of its articles and bylaws. It is primarily governed by special laws and suppletorily by the provisions of the Code. NON-STOCK EDUCATION AL CORPORATI ON A non-stock corporation

Governed by the provisions on non-stock corporations and suppletorily by the

EDUCATIONA L CORPORATIO N A special corporation which may a stock or nonstock Governed by special laws and by the general provisions of the Corporation

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provisions on stock corporations The number of board of trustees may be more than 15 The term of office of the board of trustees shall be 3 years

Code The number of the board of trustees should not be less than 5 but not more than 15. The term of office of the board of trustees shall be 5 years

2. RELIGIOUS CORPORATION A corporation composed entirely of spiritual persons and which is organized for the furtherance of a religion or for perpetuating the rights of the church or for the administration of church or religious work or property. It is different from an ordinary nonstock corporation organized for religious purposes. Kinds: a) CORPORATION SOLE - A special form of corporation, usually associated with the clergy, consisting of one person only and his successors, who is incorporated by law to give some legal capacities and advantages; and b) RELIGIOUS SOCIETIES - A non-stock corporation governed by a board but with religious purposes. It is incorporated by an aggregate of Page 87

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persons, e.g. religious order, diocese, synod, sect, etc. 4. FOREIGN CORPORATION A corporation formed, organized or existing under any law other than those of the Philippines, and whose laws allow Filipino citizens and corporations to do business in its own country or state. (Sec. 123) The definition espouses the incorporation test and the reciprocity rule and is significant for licensing purposes. It is not permitted to “transact or do business in the Philippines” until it has secured a license for that purpose from the SEC and a certificate of authority from the appropriate government agency. RESIDENT AGENT An individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation. (Sec. 127-128) CONTENTS FOR APPLICATION OF LICENSE 1. Date and term of incorporation BAR OPERATIONS 2011

2. The address of the principal office in the country of incorporation 3. The name and address of resident agent 4. The place in the Philippines where it intends to operate 5. The specific purpose or purposes 6. The names and addresses of the present directors and officers of the corporation 1. A statement of its authorized capital stock 2. A statement of its outstanding capital stock 3. A statement of the amount actually paid in 4. Such additional information as may be necessary to enable the SEC to determine whether such corporation is entitled to license GROUNDS FOR REVOCATION OF LICENSE 1. Failure to file annual reports required by the Code; 2. Failure to appoint and maintain a resident agent; 3. Failure to inform the SEC of the change of residence of the resident agent; 4. Failure to submit copy of amended articles or by-laws or articles of merger or consolidation; 5. A misrepresentation in material matters in reports; 6. Failure to pay taxes, imposts and assessments; Page 88

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7. Engage in business unauthorized by SEC; 8. Acting as dummy of a foreign corporation; and 9. Not licensed to do business in the Philippines. (Sec. 134) TEST OF “DOING OR TRANSACTING BUSINESS IN THE PHILIPPINES”: The Corporation Code does not define the phrase “doing or transacting business.” A. Jurisprudential Test (Philippine Corporate Law, Cesar Villanueva, 2001 ed.) 1. Twin characterization test a) Whether the foreign corporation is maintaining or continuing in the Philippines the body or substance of the business for which it was organized or whether it has substantially retired from it and turned it over another (Substance Test); and b) Whether there is continuity of commercial dealings and arrangements, contemplating 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 (Continuity Test). 2. 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 BAR OPERATIONS 2011

consummated Philippines.

in

M. MERGER CONSOLIDATION MERGER One or more existing corporations are absorbed by another corporation which survives (A + B = A or B) Parties called constituent corporations Absorbed corporation dissolved without liquidation of assets

Absorbing corporation acquires all assets and assumes liabilities of the absorbed corporation regardless WON creditors consented Stockholders of

the AND

CONSOLIDATI ON Union of 2 or more corporations to form a new corporation called a consolidated corporation (A + B = C) Same All constituent corporation are dissolved without liquidation of assets; consolidated corporation survives Consolidated corporation acquires all assets and assumes liabilities f constituent corporations regardless of WON creditors consented Stockholders Page 89

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absorbed of constituent corporation corporations becomes becomes stockholders of stockholders absorbing of consolidated corporation corporation PROCEDURE: a. The board of directors or trustees of each corporation shall approve a plan of merger or consolidation b. The plan shall be submitted for approval by the stockholders or members of each of such corporation at separate corporate meetings duly called for the purpose c. The articles of merger or consolidation shall be executed by each of the constituent corporations d. Submission to the SEC for approval e. The SEC may or may not conduct a hearing f. Issuance of certificate of merger or consolidation by the SEC EFFECTS OF MERGER CONSOLIDATION (Sec. 80)

OR

1. The constituent corporations shall become a single corporation which, in case of merger shall be the surviving corporation and, in the case of consolidation, shall be the consolidated corporation; BAR OPERATIONS 2011

2. The separate existence of the constituent corporation shall cease, except that of the surviving corporation; 3. The surviving or consolidated corporation shall possess all rights, privileges, immunities and powers and subject to all the duties and liabilities of a corporation; 4. The surviving or consolidated corporation shall thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; 5. All property, real or personal, and all receivables due to, and all other interest of each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; 6. The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each of the constituent corporations; 7. Any claim, action or proceeding pending by or against any of the constituent corporations may be prosecuted by or against the surviving or consolidated corporations; and 8. The rights of the creditors or lien upon the property of any of each constituent corporation shall not be impaired by such merger or consolidation. GENERAL RULE: When one corporation buys all the shares of Page 90

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another corporation, this will not operate to dissolve the other corporation and as the two corporations still maintaining their separate corporate entities, one will not answer for the debts of the other. EXCEPTIONS AS TO NONASSUMPTION OF LIABILITIES: 1. If there is an express assumption of liabilities; 2. If there is a consolidation or merger; 3. If the purchase was in fraud of creditors; and 4. If the purchaser is merely a continuation of the seller. DE FACTO MERGER One corporation acquiring all or substantially all of the properties of another corporation in exchange for shares of stock of the acquiring corporation. The acquiring corporation would endup with the business enterprise of the selling corporation whereas the latter would end up with basically its remaining assets being the shares of stock of the acquiring corporation and may then distribute it as liquidating dividend to its stockholders. (Philippine Corporate Law, Cesar Villanueva, 2001 ed.) MERGER and SALE OF CONSOLIDATI ASSETS ON Sale of assets is Merger/cons always olidation is involved not always BAR OPERATIONS 2011

There is automatic assumption of liabilities

There is continuance of the enterprise and of the stockholders Title to the assets are transferred by operation of law The constituent corporations are automatically dissolved

involved Purchasing corporation is not generally liable for the debts and liabilities of the selling corporation The selling corporation ordinarily contemplates a liquidation of the enterprise Transfer of title is by virtue of contract The selling corporation is not dissolved by the mere transfer of all its property

TYPES OF ACQUISITIONS (Philippine Corporate Law, Cesar Villanueva, 2001 ed.) a. “ASSETS-ONLY” LEVEL The purchaser is interested only in the raw assets and properties of the business. He is not interested in the entity of the corporate owner of the assets nor of the goodwill and other factors relating to the business itself. Page 91

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The transferee would not be liable for the debts and liabilities of his transferor since there is no privity of contract over debt obligations between the transferee and the transferor’s creditors b. “BUSINESS-ENTERPRISE” LEVEL The transferee merely continues the same business of the transferor since he obtains the earning capability of the venture The transferee is liable for the debts and liabilities of the transferor c. “EQUITY” LEVEL The purchaser takes control and ownership of the business by purchasing the shareholdings of the corporate owner. What the purchaser actually purchased is the ability to elect the members of the board of the corporation who run the business INSURANCE CONTRACT OF INSURANCE  Agreement whereby one undertakes for a consideration to indemnify another against loss, damage, or liability arising from an unknown or contingent event. (Sec. 2, par. 2)  A contract of suretyship shall also be deemed an BAR OPERATIONS 2011

insurance contract if made by a surety who or which is doing an insurance business. NATURE AND CHARACTERISTICS OF A CONTRACT OF INSURANCE:  ALEATORY – depends upon some contingent event.  Contract of INDEMNITY for Non-Life – recovery is commensurate to the loss. It is an investment in life insurance – secured by the insured as a measure of economic security for him during his lifetime and for his beneficiary upon his death except one secured by the creditor on the life of the debtor.  PERSONAL contract - insurer contracts with reference to the character of the insured and vice versa.  EXECUTORY & CONDITIONAL on part of the insurer.  It is one of PERFECT GOOD FAITH  Contract of ADHESION – insurance companies manage to impose upon the insured prepared contracts, which the insured cannot change. Consequently, they are to construed as follows: (a) In case there is no doubt as to the terms of the insurance contract, it is to be construed in its plain, Page 92

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ordinary, and popular sense. (b) If doubtful, ambiguous, certain, it is to be construed strictly against the insurer and liberally in favor of the insured because the latter has no voice in the selection of the words used, and the language used is selected by the lawyers of the Insurer (Qua Chee Gan vs. Law Union Rock Ins. Co. Ltd. 52 OG 1982). ELEMENTS OF AN INSURANCE CONTRACT 1. The insured should possess an interest of some kind, susceptible of pecuniary estimation – known as “insurable interest”. Generally – a person has insurable interest in the subject matter insured when: - He 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. BAR OPERATIONS 2011

- It is necessary because its absence renders the contract void. IN WHAT DOES A PERSON HAVE INSURABLE INTEREST IN (LIFE) 1. Himself, his spouse and of his children. 2. Any person on whom he depends wholly or in fact for education or support or in whom he has pecuniary interest. 3. Any person under legal obligation to him for the payment of money, respecting property or services of which death or illness might delay or prevent performance. 4. Any person upon whose life, any estate or interest vested in him depends. WHEN MUST INSURABLE INTEREST IN LIFE EXIST - Insurable interest in life must exist at the time of the effectivity of the policy and need not exist at the time of the death of the insured as life insurance is not a contract of indemnity. It is meant to give financial security to the insured or his beneficiaries (Sec. 19). However, insurable interest of a creditor on the life of the debtor must exist only at the time of effectivity but Page 93

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also at the time of the death of the debtor – as in this instance it is a contract of indemnity. His interest is capable of exact pecuniary measurement. IS THE CONSENT OF THE INSURED REQUIRED WHEN INSURANCE IS TAKEN - The law does not require the consent of the person insured and such has been considered as not essential to the validity of the contract as long as there is insurable interest at the beginning; WHEN DOES A PERSON HAVE INSURABLE INTEREST IN PROPERTY A person has insurable interest in property as every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured is an insurable interest (Sec. 13). It may consist of: (a) An existing interest (b) An inchoate interest founded on an existing interest (c) An expectancy coupled with an existing interest in that out of which the expectancy arises; BAR OPERATIONS 2011

Note: - Expectancy must be founded on an actual right to the thing or a valid contract for it; - A carrier or depository of any kind has insurable interest in the thing held by him such to the extent of his liability but not to exceed the value thereof (Sec. 13, 14, and 15). - But, a mere contingent or expectant interest in anything, not founded on contract or actual right to the thing is not insurable – as there is no insurable interest (Sec. 16). INCHOATE RIGHT – The right to lay claim on the fun is dependent on the solvency of the insurer and is subject to all other obligations of the company arising from its insurance contracts. Thus, the respondents’ interest is merely inchoate. Being a mere expectancy, it has no attribute of property. At this time, it is nonexistent and may never exist. Hence, it would be premature to make the security deposit answerable for CISCO’s present obligation to Del Monte Motors. (Republic of the Philippines v. Del Monte Motors, Inc., Oct.9, 2006 G.R. No. 156956) INSURABLE INTEREST IN BANK DEPOSITS BAR EXAM; 2000 (VIII - b) Page 94

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Q: BD has bank deposit of half a million pesos.Since the limit of trhe insurance coverage of the Philippine Deposit Insurance Corp Act ( 3591) is only one tenth of BD’s deposit, he would like some protection for the excess by taking out an insurance against all risks or contingencies of loss arising from any unsound or unsafe banking practices including unforeseen adverse effects of the continuing crisis involving the banking and financial sector in Asia. Does BD have insurable interest within the meaning of the Insurance Code? A: Yes, BD has insurable interest in his bank deposit. In case of loss of said deposit, more particularly to the extent of the amount in excess of the limit covered by the Philippine Deposit Insurance Corporation Act, BD will be damnified. He will suffer pecuniary loss of P400,000.00, that is, his bank deposit of half a million pesos minus P100,000.00 which is the maximum amount recoverable from the PDIC. MUST THE BENEFICIARY IN PROPERTY HAVE INSURABLE INTEREST ON THE PROPERTY INSURED? - YES, as no contract or policy of insurance on property shall be enforceable. Except for the benefit of some person having insurable BAR OPERATIONS 2011

interest in the property insured. COMPARE WITH INSURABLE INTEREST IN LIFE: 2002 BAR EXAM (N0.XVII) INSURABLE INTEREST IN LIFE Must exist only at the time the policy takes effect and need not exist at the time of loss Unlimited except in life insurance effected by creditor on life of debtor. The expectation of benefit to be derived from the continued existence of life need not have any legal basis whatever. A reasonable probability is sufficient without more.

INSURABLE INTEREST IN PROPERTY Must exist at the time the policy takes effect and when the loss occurs Limited to actual value of interest in property insured. An expectation of a benefit to be derived from the continued existence of the property insured must have a legal basis.

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The beneficiary need not have an insurable interest over the life of the insured if the insured himself secured the policy. However, if the life insurance was obtained by the beneficiary, the latter must have insurable interest over the life of the insured.

The beneficiary must have insurable interest over the thing insured.

CHANGE OF INTEREST IN PROPERTY INSURED (Transfer or Sale of Insured Property) (1994 & 2000 Bar Exams) A change of interest in any part of a thing insured unaccompanied by a corresponding change of interest in the insurance suspends the insurance to an equivalent extent, until the interests in the thing and the interest in the insurance are vested in the same person. (Sec. 20) BAR OPERATIONS 2011

Exceptions: 1) change of interest after the loss; 2) change of interest in one or more of several things separately insured; 3) change of interest by will or succession; and 4) transfer of interest by a partner, joint owner, or common owner, to another partner, joint owner or common owner. Bar Exam (1980): Q: A insures his house for P 10, 000 commencing January 1, 1952. On February 15, 1952, A sells the house to B for P15,000 without endorsing or transferring the fire policy to B. On April 20, 1952, the house is completely destroyed on account of the accidental fire. Can A or B collect the proceeds of the policy from the insurer? Explain and give reasons for your answer. (1952, 1959, 1980 Bar) A: Neither A, the seller, nor B, the buyer, can collect under the policy. A transfer of interest in property without any transfer of interest in the insurance suspends the latter until the interest in the property and in the insurance is vested in the same person. A has transferred his interest in the object of the insurance (the house) to B without a transfer of his interest in the insurance to B. As the interests in the object and in the Page 96

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insurance are in different persons at the time of the loss, none can recover under the policy. WHAT CHANGE IS CONTEMPLATED An absolute transfer of the property not life, a lease/mortgage. EXCEPTIONS TO THE REQUIREMENTS OF INSURABLE INTEREST: (1) Life, health or accident insurance because they are not contracts of indemnity and insurable interest is not required at the time of loss; (2) A change of interest after occurrence of an injury and results in loss – does not affect the right of the insured to indemnity; - After a loss, the liability of the insurer is fixed; (3) A change of interest in one or more several distinct things, separately insured by one policy, does not avoid as to the others; (Sec. 22) (4) A change of interest in one or more several distinct things, separately insured by one policy, does not avoid the insurance as to the insured; (Sec. 23) (5) A transfer of interest by one or several partners, joint owners, or owners in common, who are jointly insured – to the others, does not avoid insurance even BAR OPERATIONS 2011

though it has been agreed that the insurance shall lease upon an allocation of the thing insured; (6) When notwithstanding a prohibition, the consent of the insurer is obtained; and (7) When the policy is so framed that it will insure to the benefit of whomsoever may become the owner during the continuance of the risk. CONTINUATION OF ELEMENTS: 1. Insurable interest; 2. The insured is subject to risk of loss through the destruction or impairment of that interest by the happening of the designated risk; 3. The insurer assumes the risk of loss; 4. Such assertion is part of a general scheme to distribute actual loss among a large group of persons bearing somewhat similar risk; 5. As a consideration for the insurers promise, the insured makes a ratable contribution called a premium to the general insurance fund;

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WHAT MAY 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 (Sec. 3). NOTE: IN RELATION TO THE INSURANCE SO SECURE 1. The consent of the husband is not necessary for the validity of an insurance policy taken by a married woman on her life and that of her children. Under Art. 145 of the Family Code, she can also insure her separate property without the consent of the husband. 2. A minor may take out a contract for life, health and accident insurance with any company authorized to do business in the Philippines, provided it be taken out on his own life and the beneficiary named is his estate, father, mother, husband, wife, child, brother or sister. In so doing, the married woman/minor may exercise all the rights or privileges under the policy. But – What is the effect of the death of the original owner of a policy, which covers the life of a minor, ahead of the minor? – all rights, title and interest in the policy shall automatically vest in BAR OPERATIONS 2011

the minor unless otherwise provided in the policy; WHAT CANNOT BE INSURED An insurance for or against the drawing of any lottery or for or against any chance or ticket in a lottery drawing or prize. Because gambling results in profit and insurance only seeks to indemnify the insured against loss (Sec. 4). PARTIES TO A CONTRACT OF INSURANCE: 1. INSURER – every person, partnership, association or corporation duly authorized to transact insurance business as provided in the code may be an insurer. It is the party who agrees to indemnify another upon the happening of specified contingency. 2. INSURED – party to be indemnified in case of loss (Sec. 6). Anyone except a public enemy (a nation at war with Philippines and every citizen subject of such nation. BAR EXAM; 2000 (VIII - a) Q: May a member of the Moro Islamic Liberation Front ( MILF ) or it’s breakaway group, the Abu Sayaff, be insured with a company licensed to do business under the Insurance Code of the Philippines? Explain. Page 98

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A: A member of the MILF or the Abu Sayyaf may be insured with a company licensed to do business under the Insurance Code of the Philippines. What is prohibited to be insured is a public enemy. A public enemy is a citizen or national of a country with which the Philippines is at war. Such member if the MILF or the Abu Sayyaf is not a citizen or national of another country, but of the Philippines. WHO MAY INSURE A MORTGAGED PROPERTY Both the mortgagor and the mortgagee may take out separate policies with the same or different companies. The mortgagor – to the extent of his property, the mortgagee – to the extent of his credit; (Sec. 8) INSURANCE INTEREST ON MORTGAGED PROPERTY (2005 BAR EXAM (N0. X - 2- a) Armando Geagonia v. CA 241 SCRA 154 SC:

Condition 3 is what is known as “other insurance clause” which is a valid provision allowed by the insurance code in order to prevent in an increase in the moral hazard and to serve as a warranty that no other insurance exists. Its incorporation in fire policies prevents over insurance and adverts the perpetration of BAR OPERATIONS 2011

fraud. Its violation will thus avoid the policy. However, in order to constitute a violation, the other insurance must be upon the same subject matter, the same interest therein, and the same risk. Double insurance exists where the same person is insured by several insurers separately in respect of the same subject and interest. The court ruled that since the stocks in trade insured with PFIC were mortgaged property, separate insurances covering different insurable interests may be obtained by the mortgagor and mortgagee. The insurable interests of a mortgagor and mortgagee are separate and distinct, thus no double insurance exists since the policies of PFIC do not cover the same interest as that covered under the policy of Country Banker’s Insurance Corp. The non-disclosure of the policies with PFIC was not fatal to Armando’s right to recover on his policy with Country Banker’s Insurance Corp. WHAT ARE THE CONSEQUENCES WHERE THE MORTGAGOR INSURES THE PROPERTY MORTGAGED IN HIS OWN NAME BUT MAY THE LOSS PAYABLE TO THE MORTGAGEE OR ASSIGNS THE POLICY TO HIM: a. The insurance is still deemed to be upon the interest of the Page 99

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mortgagor who does not cease to be a party to the original contract. Hence, if the policy is cancelled, notice must be given to the mortgagor. b. Any act of the mortgagor, prior to loss, which would otherwise avoid the policy or insurance, will have the same effect although the property is in the hands of the mortgagee. Hence, if there is a violation of the policy by the mortgagor, the mortgagee cannot recover. c. Any act required to be done by the mortgagor may be performed by the mortgagee with the same effect if it has been performed by the mortgagor. d. Upon the occurrence of the loss, the mortgagee is entitled to recover to the extent of his credit and the balance if any to be paid to the mortgagor, since such is for both their benefits; e. Upon recovery by the mortgagee, his credit is extinguished; Note: Union Mortgage Clause – creates the relation of insured and insurer between mortgagee and the insurer independent of the contract of the mortgagor. In such case, any act of the mortgagor can no longer affect the rights of the mortgagee – the insurance contract is now BAR OPERATIONS 2011

independent of that with the mortgagor; WHAT IS THE EFFECT OF INSURANCE PROCURED BY THE MORTGAGEE WITHOUT REFERENCE TO THE RIGHT OF THE MORTGAGOR a. The mortgagee may collect from the insurer upon the occurrence of the loss to the extent of his credit. b. Unless otherwise stated, the mortgagor cannot collect the balance of the proceeds after the mortgagee is paid. c. The insurer, after payment to the mortgagee, becomes subrogated to the rights of the mortgagee against the mortgagor and may collect the debt to the extent paid to the mortgagee. d. The mortgagee after payment cannot collect anymore from the mortgagor but if he is unable to collect in full from insurer, he can recover from the mortgagor. e. The mortgagor is not released from the debt because the insurer is subrogated in place of the mortgagee. 3. BENEFICIARY – the person who receives the benefits of an insurance policy upon maturity.

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BENEFICIARIES IN LIFE INSURANCE  Anyone, except who are prohibited by law to receive donations from the insured. Note Art. 739 of the Civil Code, hence the following cannot be designated as beneficiaries.  Those made between persons guilty of adultery or concubinage at the time of the designation.  Those guilty of the same criminal offense in consideration thereof. BAR EXAM (2008) Q: On January 1, 2000, Antonio Rivera secured a life insurance from SOS Insurance Corp. for P1 Million with Gemma Rivera, his adopted daughter, as the beneficiary. Antonio Rivera died on March 4, 2005 and in the police investigation, it was ascertained that Gemma Rivera participated as an accessory in the killing of Antonio Rivera. Can SOS Insurance Corp. avoid liability by setting up as a defense the participation of Gemma Rivera in the killing of Antonio Rivera? Discuss with reasons. A: Sec. 12: The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured; in which event, the BAR OPERATIONS 2011

nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified. Thus, the insurance company must still pay out the proceeds of the life insurance policy to the nearest qualified relative of the insured. Those made to a public officer or his wife, descendants/ascendants by reasons of his office. - A prior conviction for adultery/concubinage is not required, it can be proven by preponderance of evidence in the same action nullifying the designation. Note the cases of Insular Life vs. Ebrado, 80 SCRA 181, where a common law wife of the insured who is married could not be named as a beneficiary and SSS vs. Davac, 17 SCRA 863, where the insured designated his second wife as a beneficiary was upheld as the latter was not aware of the first marriage. Beneficiary in life and property insurance (BAR EXAMS; 2005) Philippine American Life Insurance Company v. Pineda (175 SCRA 416) SC:

Under the law, the beneficiary designated in a life Page 101

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insurance contract cannot be changed without his or her consent because of the beneficiary’s vested interest in the policy. In this regard, it is worth nothing that the beneficiary designation indorsement which forms part of the policy in the name of Rodolfo Dimayuga states that the designation of the beneficiaries is irrevocable and no right or privilege under the policy may be exercised, or agreement made with the insurance company to any change in or amendment to the policy without the consent of the said beneficiary. Accordingly, based on the provisions of the contract and the law applicable, it is only with the consent of all the beneficiaries that any change or amendment to the policy concerning the irrevocability of beneficiaries may be legally and validly effected. Insurable interest on property (BAR EXAMS, 2009) Spouses Nilo Cha v. CA Aug. 18, 1997 SC: 1. The lessor cannot validly be a beneficiary of the fire insurance policy taken by the spouses Cha. It has no insurable interest on the merchandize insured because it remains with the spouses. BAR OPERATIONS 2011

2. The automatic assignment of the policy to the lessor is void for being contrary to law and public policy. The proceeds of the fire insurance policy rightfully belong to the Sps. Cha. 3. The insurer cannot be compelled to pay the proceeds of the policy to the lessor who has no insurable interest on the property insured. CAN THE BENEFICIARY BE CHANGED - The insured shall have the right to change the beneficiary he designated – unless he has expressly waived the right in the policy (Sec. 11); - If he has waived the right, the effect is to make the designation as irrevocable. Note that the designation of the guilty spouse as irrevocable beneficiary is revocable as the instance of the innocent spouse in cases of termination of: (1) a subsequent marriage; (2) nullification of marriage; (3) annulment of marriage; and (4) legal separation (Art. 34, (4) Family Code WHAT IS THE EXTENT OF THE INTEREST OF THE Page 102

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IRREVOCABLE BENEFICIARY IN A LIFE INSURANCE CONTRACT The beneficiary has a vested right that cannot be taken away without his consent. In fact should the insured discontinue payment of the premium, the beneficiary may continue paying. Neither can the insured get a loan or obtain the cash surrender value of the policy without his consent (Nario vs. Philamlife, 20 SCRA 434). Note: Where the wife and minor children were named irrevocable beneficiaries, wife dies, the husband seeks to change the beneficiaries with the consent of the children. The consent is not valid due to minority. (Philamlife vs. Pineda, 170 SCRA 416) BAR EXAM; 2005 (NO. IX -1) Q: What are the effects of an irrevocable designation of a beneficiary under the Insurance Code? Explain. A: The irrevocable beneficiary has a vested interest in the policy, including its incident such as the policy loan and cash surrender value. (Grogorio v. Sun Life Assurance Company of Canada, 48 Phil. 53 [1925]) 2005 BAR EXAM (NO. IX- 2) Q: Jacob obtained a life insurance policy for P1 Million designating irrevocably Diwata, a friend, as his beneficiary. Jacob, however, changed his BAR OPERATIONS 2011

mind and wants Yob and Jojo, his other friends, to be included as beneficiaries considering that the proceeds of the policy are sufficient for the three friends.Can Jacob still add Yob and Jojo as his beneficiaries? Explain. A: The insured cannot add other beneficiaries as this would diminish the interest of Diwata who is the irrevocably designated beneficiary. The insured can only do so with the consent of Diwata. WHAT IS THE INTEREST OF AN IRREVOCABLE BENEFICIARY IN AN ENDOWMENT POLICY His interest is contingent as benefits are to be paid only if the assured dies before the specified period. If the insured outlives the period, the benefits are paid to the insured. WHAT IS THE EFFECT OF FAILURE TO DESIGNATE OR BENEFICIARY IS DISQUALIFIED The benefits of the policy shall accrue to the estate of the insured. WHO RECOVERS IF BENEFICIARY PREDECEASES THE INSURED  If designation is irrevocable, the legal representatives of the beneficiary may recover unless it was stipulated that Page 103

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the benefits are payable only “if living.”  If revocable, and no change is made, the benefits passes to the estate of the insured. The rule holds also if benefits were payable “only if living” or “if surviving” and the beneficiary dies before the insured. CONCEALMENT  Neglect to communicate that which a party knows and ought to communicate (Sec. 26). EFFECT OF CONCEALMENT Whether intentional or not, it entitles the injured party to rescind the contract of insurance (Sec. 27). 2001 BAR EXAM (N0.XVI) Q: A applied for a non-medical life insurance. The insured did not inform the insurer that one week prior to his application for insurance, he was examined and confined at St. Lukes hospital where he was diagnosed for lung cancer. The insured soon thereafter died in a plane crash. Is the insurer liable considering that the fact concealed had no bearing with the cause of death of the insured? Why? A: No. The concealed fact is material to the approval and BAR OPERATIONS 2011

issuance of the insurance policy. It is well settled that the insured need not die of the disease he failed to disclose to the insurer. It is sufficient that his nondisclosure misled the insurer in forming his estimate of the risks of the proposed insurance policy or in making inquiries. WHO MUST PROVE KNOWLEDGE OF THE FACT CONCEALED? The party claiming existence of concealment must prove that there was knowledge on the part of the party charged with concealment. AS OF WHAT TIME MUST THE PARTY CHARGED WITH CONCEALMENT HAVE KNOWLEDGE OF THE FACT CONCEALED - Generally, at the time of the effectivity of the policy. Note that even if a party did not know of the existence at the crime of application but before its effectivity, there is concealment. - 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 Page 104

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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. HOW IS THE MATERIALITY OF THE CONCEALMENT OR REPRESENTATION DETERMINED? Determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract or in making his inquiries. (Sec. 31) MUST THERE BE A CAUSAL CONNECTION BETWEEN THE FACT CONCERNED AND THE CAUSE OF THE LOSS? Not necessary. It is sufficient that the non-revelation has misled the insurer in forming its estimate of disadvantage of fixing the premium. WHAT FACTS MUST BE COMMUNICATED? (a) Such fact within his knowledge – as concealment requires knowledge of the fact concealed by the party charged with concealment. (b) Fact/s material to the contract – it must be of BAR OPERATIONS 2011

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 (Sec. 28) – as the existence of a warranty make the requirement to disclose superfluous but – an intentional fraudulent omission on the part of the one insured to communicate information on a matter proving or tending to prove falsity of a warranty entitles the insurer to rescind. (Sec. 29) 1996, 1997, and 2001 BAR EXAMS Sun Life Assurance Co. of Canada vs. CA, June 22, 1995 Robert Bacani was issued life insurance non-medical policy for P100,000.00 with his mother as beneficiary. In his application, he concealed his confinement at the Lung Center of the Philippines for certain illness. He died of a plane crash. The insurance company refused to pay for breach of the insurance contract.RTC and CA granted the claim of the beneficiary because the concealed facts were not

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material or irrelevant to the cause of death. SC:

The SC reversed the ruling and held that the information which the insured failed to disclose was material and relevant to the approval and issuance of the policy. The facts concealed would have affected the insurer’s action on the application either by charging a higher rate of premium or rejecting the same. The insured need not die of the disease he concealed. It is sufficient that his non-disclosure misled the insurer in forming his estimate of the risk involved or in making inquiries. The contract of insurance can be rescinded by reason of concealment and this has to be exercised within the two year contestability period. REPRESENTATION  Oral or written statement of a fact or a condition affecting the risk made by the insured to the insurance company, tending to induce the insurer to take the risk. (Sec. 36) WHEN MAY REPRESENTATION BE MADE Since it is an inducement to entering a contract – it must ordinarily be made at the same time as or before – the insurance of the policy (Sec. 37). Note that it can also be made after the BAR OPERATIONS 2011

issuance of the policy when the purpose thereof is to induce the insurer to modify an existing insurance contract – as the provisions also apply to a modification (Same with concealment) FORMS AND KINDS REPRESENTATION

OF

It may be Oral or Written and can either be: (a) Affirmative –an affirmation of a fact existing when the contract begins. (b) Promissory –statement by the insured concerning what is to happen during the term of the insurance. IS A REPRESENTATION PART OF THE CONTRACT No, it cannot qualify as an express provision in a contract (it is a collateral inducement to the contract but it may qualify an implied warranty. (Sec. 40) CAN A REPRESENTATION BE WITHDRAWN OR ALTERED Yes, as long as the insurance has not yet been effected and the insurer has not yet been induced to issue the policy. If withdrawn or altered afterwards, the contract can be rescinded as the insurer has already been led to issue the policy. (Sec. 41) TO WHAT DATE DOES REPRESENTATION REFER

A

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It must be presumed to refer to the date on which the contract goes into effect. (Sec. 42) Note: There is no false representation if it is true at the time the contract takes effect although false at the time it is made. WHEN IS THE INSURED REQUIRED TO DISCLOSE INFORMATION FROM A 3RD PERSON When the information material to the transaction was acquired by an agent of the insured, as knowledge of the agent is also knowledge of the principal. WHAT IS THE EFFECT OF MISREPRESENTATION ON A MATERIAL POINT? If it is false on 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 despite knowledge of the ground to rescind. (Sec. 45) WHEN IS THE RIGHT TO RESCIND SUPPOSED TO BE EXERCISED It is exercised previous to the commencement of an action on the contract (Sec. 48). Note the case of Tan Chay Hing vs. West Coast Life Insurance Co., 51 Phil 80, where an insurer interposed BAR OPERATIONS 2011

the defense in an action to claim the proceeds that the contract is null and void. Section 48 was held to apply only when there is a contract to rescind. It is also qualified by 2nd paragraph of Section 48 which provides that after a policy of life insurance payable on the death of the insured shall have been in force during the lifetime of the insured for a period of 2 years from the date of issue or its last reinstatement, the insurer cannot prove 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 (known as the incontestability clause). WHAT IS THE THEORY AND OBJECT BEHIND THE INCONTESTABILITY CLAUSE (a) On the part of the insurer – an insurer has/should have a reasonable opportunity to investigate the statements which are made by the applicant an that after a definite period, it should no longer be permitted to question its validity. (b) On part of the insured – its object is to give the greatest possible assurance that the beneficiaries would receive payment of the Page 107

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proceeds without question as to validity or the policy. REQUISITES OF INCONTESTABILITY CLAUSE (1) It is a life insurance policy; (2) It is payable on the death of the insured; (3) It has been in force during the lifetime of the insured for at least two years from date of issue/or last reinstatement. WHAT DEFENSES ARE NOT BARRED BY INCONTESTABILITY EVEN AFTER THE LAPSE OF 2 YEARS? (1) non-payment of premiums; (2) lack of insurable interest; (3) that the cause of death was excepted or not covered by the terms of the policy; (4) that the fraud was of a particular vicious type such as: a. policy was taken in furtherance of a scheme to murder the insured; b. where the insured substituted another for the medical examination;

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c. where the beneficiary feloniously killed the insured; (5) violation of a condition in the policy relating to military or naval service in time of war; (6) the necessary notice or proof of death was not given; (7) action is not brought within time specified in the policy, which in no case should be less than 1 year as per Sec. 63. CONCEALMENT AND REPRESENTATION COMPARED 1. In concealment – the insured withholds information of material facts, while in representation – the insured makes erroneous statements; 2. In concealment and misrepresentation both give the insurer the right to rescind the contract of insurance; 3. The materiality of concealment and representation are determined by the same rules; 4. Whether the concealment or representation is intentional or not, the injured party can rescind; 5. Since insurance contracts are of utmost good faith – Page 108

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the insurer is also covered by the rules. POLICY  It is the written instrument in which a contract of insurance is set forth. (Sec. 49) WHAT MUST A POLICY SPECIFY? A policy must specify: (1) The parties whom the contract is made; (2) The amount to be insured except in open or running policies; (3) The premium, or if the premium is to be determined at the termination of the contract, a statement of the basis and rates upon which the final premium is to be determined; (4) The property or life insured; (5) The interest of the insured in the property insured, if not the absolute owner; (6) The risks insured against; (7) The period during which the insurance is to continue. (Sec. 51) COVER NOTES  It is a written memorandum of the most important terms of a preliminary contract of insurance intended to give protection pending BAR OPERATIONS 2011

investigation by the insurer of the risk or until the insurance of the formal policy (Sec. 52). It is also known as binding slip or receipt or binder. EFFECTIVITY OF A COVER NOTE The effectivity of a cover note is 60 days – as within such period, a policy shall be issued including in its terms the identical assurance found under the cover rate and the premium therefore. It may however, be extended beyond 60 days and with the written approval of the Insurance Commissioner if he determines that it does not violate the Insurance Code. NOTE THE FOLLOWING RULES HAVE BEEN PROMULGATED BY THE INSURANCE COMMISSIONER: (1) A cover note is valid for 60 days whether or not a premium is paid but may be cancelled by either party upon at least 7-day notice to the other party. (2) If the other note is not cancelled, a regular policy must be issued within 60 days from the date of issue of the cover note including within its terms the identical insurance. (3) It may be extended with the written approval of the commissioner but may be dispensed with by Page 109

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a certification of the President, Vice-President or General Manager of the insurer that the risks involved and the extension do not violate the code. (4) Insurance companies may impose a deposit premium equivalent to at least 25% of the estimated premium but in no case less than Php500.00. IS PAYMENT OF A PREMIUM PAYMENT FOR THE COVER NOTE NECESSARY TO BE PROTECTED AGAINST RISK INSURED AGAINST? Cover note held to be binding despite the absence of a premium payment for its issuance. No separate premiums are intended or required to be paid on a cover note because they do not contain particulars of the property insured that would serve as the basis for the computation of premiums – such being the case no premium can be fixed. The cover notes should not be treated as a separate policy but should be integrated in the regular policy subsequently issued so that premiums on the regular policy should include that for the cover note (Pacific Timber vs. CA, 112 SCRA 199); BAR EXAM; 2009 (IV) BAR OPERATIONS 2011

Q: Antarctica Life Assurance Corporation (ALAC) publicly offered a specially designed insurance policy covering persons between the ages of 50 to 75 who may be afflicted with serious and debilitating illnesses. Quirico applied for insurance coverage, stating that he was already 80 years old. Nonetheless, ALAC approved his application.Quirico then requested ALAC for the issuance of a cover note while he was trying to raise funds to pay the insurance premium. ALAC granted the request. Ten days after he received the cover note, Quirico had a heart seizure and had to be hospitalized. He then filed a claim on the policy. a. Can ALAC validly deny the claim on the ground that the insurance coverage, as publicly offered, was available only to persons 50 to 75 years of age? Why or why not? (2%) b. Did ALAC’s issuance of a cover note result in the perfection of an insurance contract between Quirico and ALAC? Explain. A: a. No. There was no concealment on the part of Quirico as to his age. Page 110

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b. Yes, one of the exception of the cash and carry rule is in life insurance when the grace period applies. in the case at bar, the issuance of the cover note shows that the insurer granted a grace period. WHOSE INTEREST IS INSURED (1) The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy (Sec. 53). MAY A 3RD PERSON SUE THE INSURER – No, in general rule unless there is stipulation. Unless otherwise specified in the policy, a 3RD person may sue if: (a) The insurance contract contain stipulation in favor of a 3RD person, the latter though not a party may sue to enforce before the contract is revoked by the parties; (b) The insurance contract provides for indemnity against liability to 3RD persons. The test to determine whether a 3rd person may directly sue the insurer of the wrongdoer is: if the contract provides indemnity against liability to 3RD persons, then the latter to whom the insured is liable may directly sue the insurer, BAR OPERATIONS 2011

on the other hand, if the insurance if for the indemnity against actual loss or payment – then the 3rd person cannot sue the insurer – recourse is against the insured alone. (2) If the contract is executed with an agent or trustee as the insured, the fact that his principal or beneficiary is the real party in interest may be indicated by describing the insured as the agent/trustee or by general words in the policy (Sec. 54). If not indicated, it is as if the insurance is the taken out by the agent/trustee alone, consequently the principal has no right against the insurer; (3) If a partner or part owner effects insurance, it is necessary that the terms of the policy should be such as are applicable to the joint or common interest so that it may be applicable to the interest of his copartners/owners (Sec. 55). Consequently, the policy must state that the interest of all is insured, if not, it is only the interest of the one getting the policy that is insured;

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(4) When the description of the insured in the policy is so general that it may comprehend any person or any class of persons, only he who can show that it was intended to include him can claim the benefit of the policy (Sec. 56). (5) When a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk may become the owner of the interest insured (Sec. 57). The proceeds become payable to who may be the owner at the time the loss or injury occurs. This is an exception to Sec. 20. (6) The mere transfer of a thing insured does not transfer the policy but suspends it until the same person becomes the owner of both the policy and the thing insured (Sec. 58). Note the exceptions to this rule as found in Sec. 2024 and 57. KINDS OF INSURANCE POLICIES:  Open Policy - value of the thing insured is not agreed upon, but is left to be ascertained in case of loss (Sec. 60). What is mentioned, as the amount is not the value of the BAR OPERATIONS 2011

property but merely the maximum limit of the insurer’s liability. In case of loss, the insurer only pays the actual cash value at the time of loss.  Valued Policy - expresses on its face that the thing insured shall be valued at a specified sum (Sec. 61). The valuation of the property insured is conclusive between the parties. In the absence of fraud or mistake, such value will be paid in case of a total loss.  Running Policy (Floating Policy) -contemplates successive insurances and which provides that the object of the policy may be from time to time defined especially as to the subjects of insurance, by additional statements or indorsements (Sec. 62). This is also known as a Floating Policy – usually issued to provide indemnity for property, which cannot be covered by specific insurance because of a frequent change in location and quantity. VALUED POLICY vs. OPEN POLICY Page 112

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OPEN POLICY

Phil 696, ACCFA vs. Insurance, 24 SCRA 151).

Proof of value of the thing after the loss is not necessary.

Insured must prove the value of the thing insured.

WHERE IS THE ACTION FILED

Parties have conclusively stipulated that the property insured is valued at a specified sum.

Value is not agreed but left to be ascertained upon loss.

VALUED POLICY

CAN THERE BE AGREEMENTS AS TO PRESCRIPTION OF AN ACTION OR LIMITATIONS ON THE PERIOD OF TIME TO BRING AN ACTION Yes, provided the period agreed upon should not be less than one year (Section 63). If less than one year, the agreement is void. The period so agreed shall be considered as having commenced from the time the cause of action accrues. Usually, the cause of action accrues from the date of the insurers rejection of the claim of the beneficiary or of the insured – since before rejection there is no necessity to bring suit. When no period is stipulated or if the stipulation is void, the period is within 10 years under article 1144, New Civil Code, it being a written contract (Eagle Star vs. Chia Yu 96 BAR OPERATIONS 2011

Alpha

The action may be filed in the following: (1) Courts; (2) Insurance Commissioner, who has concurrent jurisdiction with courts for claims not exceeding Php100,000.00; (3) POEA/DOLE have the power to compel a surety to make good on a solidary undertaking in the same proceeding where the liability of the principal obligor is determined. Note that the claim becomes action upon filing with the court. CANCELLATION OF THE POLICY If policy other than life shall be cancelled by the insurer except upon prior notice thereof to the insured. No notice of cancellation shall be effective if not based on the occurrence, after effective date of one or more grounds: (Section 64) (1) Non payment of premium; (2) Conviction of a crime arising out of acts increasing the hazard insured against (3) Discovery of material representation; Page 113

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(4) Discovery of willful or reckless acts or omissions increasing the hazard insured against; (5) Physical changes in the property insured which the result in the property being uninsurable; (6) Determination by the insurance commissioner that continuation of the policy would place the insurer in violation of the code: FORM OF NOTICE OF CANCELLATION It must be in writing, mailed or delivered to the name insured at the address shown in the policy which shall state: (1) The grounds relied upon as per Section 64, and; (2) That upon written request of the named insured, the insurer will furnish the facts on which cancellation is based (Sec. 65). WARRANTIES  It is a statement or promise stated in the policy or incorporated therein by reference, whereby the insured – expressly or impliedly (Section 67) contracts as to the past, present or future (Section 68) existence of certain facts, conditions or circumstances – BAR OPERATIONS 2011

the literal truth of which is essential to the validity of the contract. KINDS OF WARRANTIES (1) Affirmative – those that relate to matters that exist at or before the issuance of the policy; (2) Promissory – those where the insured promises or undertakes that certain matters shall exist or will be done or will be omitted after the policy takes effect. It is a statement in the policy, which imparts that it is intended to do or not to do a thing which materially affects the risk, is a warranty that such act or omission shall take place (Section 72); (3)

Express – a statement in a policy of a matter relating to the person or thing insured or to the risk as a fact (Section 71) and where the assertion or promise is clearly set forth in the policy or incorporated therein by reference. They can be affirmative or promissory warranties; An express warranty made at or before the Page 114

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execution of the policy should be contained (a) in the policy itself (b) in another instrument signed by the insured and referred to in the policy as making a part of it (Section 70). This includes a rider – it is a part of the policy, it need not be signed unless the rider was issued after the original policy took effect; (4) Implied – where the assertion or promise is not expressly set forth in the policy but because of the general tenor of the terms of the policy or from the very nature of the insurance contract, a warranty is necessarily inferred or understood. Note that the law only provides for implied warranties in contracts of marine insurance. See Sec. 113 (seaworthiness) and 126 (deviation). EFFECT OF 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 (Sec. 74). Note that the insured can exercise the right also when the insurer violates a warranty, like when it BAR OPERATIONS 2011

refuses to grant a loan on the policy.  Note that a causal connection between the violation of the warranty is not necessary – So, even if the violation did act contribute in the loss – the other party may still rescind. THE NON PERFORMANCE OF A PROMISSORY WARRANTY DOES NOT AVOID THE POLICY WHEN BEFORE THE ARRIVAL OF THE TIME FOR PERFORMANCE (Sec. 73) (1) The loss insured against happens; (2) The performance becomes unlawful at the place of the contract; (3) The performance becomes impossible. WARRANTY VS. REPRESENTATIONS WARRANTY REPRESENTATIO N Part of the Merely a collateral contract inducement thereto Expressly set forth in the policy or incorporate d therein by reference Strictly and literally performed

May be oral or written in another statement

Must be substantially true Page 115

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Presumed material

Must be shown to be so

Breach of warranty is a breach of the contract itself

Misrepresentation is a ground to rescind the contract

PREMIUM  The agreed price for assuming and carrying the risk. WHEN IS THE INSURER ENTITLED TO A PREMIUM? The insurer is entitled to the payment of a premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium is paid except in: (1) In case of life or industrial life (life insurance policy where the premium is payable monthly or oftener) whenever the grace period applies (Sec. 77); (2) When the insurer makes a written acknowledgement of the receipt of premium, such is conclusive evidence of the payment of the premium to make it binding notwithstanding any stipulation therein BAR OPERATIONS 2011

that it shall not be binding until the premium is paid (Sec. 78) HENCE, the effect of an acknowledgement in a policy or contract of insurance of the receipt of the premium – is that it is conclusive evidence of payment – so far as to make the policy binding. However, it is conclusive only to make the policy binding and not for the purpose of collecting premium, and; (3) Where the obligee has accepted the bond or suretyship contract in which case such bond or suretyship contract becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety (Sec. 177). EXCEPTIONS TO SECTION 77: UCPB General Insurance Inc. vs .Masagana Telemart, Inc. (G.R. No. 137172 April 4, 2001) 1. When the grace periods applies; (Sec. 77) 2. When the insurer makes a written acknowledgment of the receipt premium; (Sec. 78) 3. Section 77 may not apply if the parties have agreed to the Page 116

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payment of the premium in installments and partial payment has been made at the time of the loss; (Makati Tuscany Condominium Corp. v. CA, 215 SCRA 462) 4. If the insurer granted the insured a credit term for the payment of the premium and loss occurs before the expiration of the term, recovery should be allowed even the premium is paid after the loss but within the credit term; 5. Where the parties are barred by estoppel. WHAT IS THE EFFECT OF PARTIAL PAYMENT? Ordinarily, the obligation to pay premium when due is considered an indivisible obligation. Hence, forfeiture is not prevented by a part payment unless, payment by installment has been agreed upon or is the established practice – the basic principles of equity and fairness would not allow the insurer to collect and accept installments and later deny liability as premiums were not paid in full. PAYMENT TO INSURANCE AGENT OR BROKER --payment to the insurance company. WHEN IS THE INSURED ENTITLED TO A RETURN OF BAR OPERATIONS 2011

THE PREMIUMS PAID? 2000 BAR EXAM (IX – a) The insured is entitled to a return when: (1) To the whole premium, when no part of the interest in the thing insured is exposed to any of the perils insured against (Sec. 79 –A); (2) Where the insurance is made for a definite period of time and the insured surrenders his policy before the expiration of the period, here the insured only recovers a portion of the policy premiums corresponding with the unexpired time but it does not apply if: (a) the policy is not so definite; (b) a short period rate (insurance is for a period of less than a year and a rate has been agreed to if the policy is surrendered; Example: If the policy is in force for a month the insurer retains 20% of the premium) has been agreed upon; (c) the policy is a life insurance policy – it is indivisible but he has a cash surrender value; Page 117

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(3) When the contract is voidable on account of fraud or misrepresentation of the insurer or the agent (Sec. 81); (4) Where the contract is voidable on account of facts, the existence of which the insured was ignorant without his fault (Sec. 81); (5) When by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy (Sec. 81); (6) In case of over insurance. Here the insurance is in excess of the amount of the insurable interest of the insured and it is insured by several insurers, the insured is entitled to a RATABLE RETURN OF PREMIUM, proportional to the amount by which the aggregate sum insured in all the policies exceeds the insurable value; WHEN ARE THEY NOT RECOVERABLE Premiums cannot be recovered: (1) If the peril insured against has existed, and the insurer has been liable for any period, the BAR OPERATIONS 2011

period being entire and indivisible (Sec. 80). (2) In life insurance – (Sec. 79-b) cash surrender value. (3) When the insured is guilty of fraud or misrepresentation (Sec. 81). LOSS AND NOTICE OF LOSS WHAT ARE THE RULES TO DETERMINE WHETHER THE INSURER IS LIABLE FOR THE LOSS OF THE THING INSURED? 1. Loss of which a peril insured is the proximate cause. 2. 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 if 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 (Sec. 85). Here the principle of proximate cause is extended to loss incurred while saving the thing insured.

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3. Where a peril is especially excepted in a contract of insurance a loss, which would not have occurred but for such peril, is thereby excepted although the immediate cause of the loss was a peril which was not excepted (Sec. 86). The immediate cause is the CAUSE OR CONDITION NEAREST THE TIME AND PLACE OF THE INJURY. Here, the insurer will be liable if both the immediate cause and the proximate cause are not excepted. If the proximate cause is excepted and the immediate cause is not, the insurer is not liable. 4. An insurer is not liable for loss caused by the willful act or through the convenience of the insured; but he is not exonerated by the negligence of the insured, or of the insured’s agent or others (Sec. 87). 2007 BAR EXAM (IV) Q: Alfredo took out a policy to insure his commercial building against fire. The broker for the insurance company agreed to give a 15day credit within which to pay the insurance premium. Upon delivery of the policy on May 15, 2006, Alfredo issued a postdated check payable on BAR OPERATIONS 2011

May 30, 2006. On May 28, 2006, a fire broke out and destroyed the building owned by Alfredo.Reason briefly in (a), (b) and (c). a. May Alfredo recover on the insurance policy? A: Yes, Alfredo can recover on the insurance policy. Although Section 77 of the Insurance Code provides that in fire insurance, payment of premium is necessary for validity of the policy (also known as “cash and carry” provision), nonetheless, the rule has been modified by the decisions of the Supreme Court after the promulgation of the Insurance Code. Thus, in UCPB General Insurance v. Masagana Telemart, G.R. No. 137172, April 4, 2001, it was held that the insured should be allowed to recover on losses sustained even when premium was paid after the fact of loss, provided payment was received by the insurer during the credit period given to the insured. (See also South Sea Surety v. Court of Appeals, G.R. No. 102253, June 2, 1995; American Home Assurance v. Chua, G.R. No. 130421, June 28, 1999) where the Supreme Court ruled that is the check payment for premium was received by the insurer prior to the loss or within the credit period, the insured was allowed to recover. b. Would your answer in (a) be Page 119

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the same if it was found that the proximate cause of the fire was an explosion and that fire was but the immediate cause of loss and there is no excepted peril under the policy? Yes, recovering under an insurance contract is allowed if the cause of the loss was either the proximate or the immediate cause as long as an expected peril was not the proximate cause of the loss. (Section 86, Insurance Code of the Philippines.) The fire being the immediate cause for the loss of the commercial building, would warrant recovery under the policy. c. If the fire was found to have been caused by Alfredo's own negligence, can he still recover on the policy? Yes, he can still recover. The doctrine of contributory negligence does not in any way apply to rights under a contract of insurance, unless it is a case of willful act. (Section 87, Insurance Code of the Philippines) RECOGNIZING THAT THERE ARE PROBLEMS IN DETERMINING PROXIMATE CAUSE – NOTE THE FOLLOWING RULES: (a) If there is a single cause which is an insured peril, clearly it is the proximate cause and there is liability; BAR OPERATIONS 2011

(b) If there are concurrent causes (those happening together) with no excluded perils, there if liability if one of the causes is an insured peril, the others may be ignored; (c) If there are concurrent causes with an excepted peril (insured peril operate together to produce the loss) the claim will be outside the scope of the policy; (d) But if the results of the operation of the insured peril can be clearly separated from the effects of the excepted peril, the insurer is liable; (e) Where a number of causes operate one from the other, the original cause happens to be a peril, the insurer is liable. TRANSFER OF CLAIMS An agreement not to transfer the claim of the insured after the loss happens – is VOID if MADE BEFORE THE LOSS except as otherwise provided in case of life insurance (Sec. 33). This means that the insured has an absolute right to transfer his claim against the insurer AFTER THE LOSS occurs, what is prohibited is a transfer prior to the loss. This is so because such stipulation after the loss occurs Page 120

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shall hinder the transmission of property. Neither does it affect the insurer as its liability is already fixed and what is actually assigned is the money claim, not the contract itself. The exception in Sec. 173 that provides that the transfer of a fire insurance policy to any person or company who acts as an agent for or otherwise represents the issuing company is prohibited and is void insofar as it affects other creditors of the insured. NOTICE AND PROOF OF LOSS Notice of loss must be given without unnecessary delay by the insured or some person entitled to the benefit of the insurance. IF NOT THEN, the insurer is exonerated (Sec. 88). WITHOUT UNNECESSARY DELAY – is within a reasonable time, depending on circumstances of a peculiar case, although courts have construed the requirement liberally in favor of the insured. PROOF OF LOSS If the policy requires Preliminary Proof of Loss (evidence given the insurer of the occurrence of the loss, its particulars, and data necessary to enable it to determine liability and the amount thereof) IT IS NOT NECESSARY that the insured give such proof – AS MAY OR WOULD BE NECESSARY IN A COURT OF JUSTICE WHAT IS BAR OPERATIONS 2011

SUFFICIENT is the BEST EVIDENCE which he has in his power at that time (Sec. 89). WHEN ARE DEFECTS IN THE NOTICE OR PROOF LOSS DEEMED WAIVED BY THE INSURER  When the insurer fails to specify to the insured any defect which the insured can remedy without delay.  When the insurer denies liability on a ground other than that defect in the notice or proof of loss. WHEN IS DELAY IN THE GIVING OF NOTICE WAIVED 1. If it is caused by any act of the insurer. 2. If the insurer omits to make an objection promptly and specifically on that ground. – despite delay, the insurer does not object (Sec. 91). WHAT HAPPENS AFTER PAYMENT BY THE INSURER SUBSEQUENT TO GIVING OF NOTICE OF LOSS In property insurance, after the insured has received payment from the insurer of the loss covered by the policy, the insurance company is SUBROGATED to the rights of the insured against the wrongdoer or the person who has violated the contract. The right of subrogation Page 121

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accrues upon payment of the insurance claim. NOTE: Subrogation takes effect by operation of law and does not require the consent of the wrong doer (Fireman’s Fire Insurance vs. Jamilla & Company, 70 SCRA 323). THERE IS NO SUBROGATION IN: (a) Life insurance as it is not a contract of indemnity (b) When proximate cause of the loss is the insured himself (c)When the insurer pays to the insured a loss not covered by the policy; DOUBLE INSURANCE Where the same person is insured by several insurers separately in respect to the same subject or interest (Sec. 91). 2005 BAR EXAM (N0. X – 2 -b) Q: What is the nature of the liability of the several insurers in double insurance? Explain. A: In double insurance, the insurers considered as coinsurers. Each one is bound to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. (Section 94(e), Insurance Code.

REQUISITES OF DOUBLE INSURANCE: 1. Same person is insured; 2. There are several insurers; 3. Subject insured is the same; 4. Interest insured is the same; 5. Risk of peril insured against is the same;  There is prohibition TO PREVENT OVERINSURANCE, thus preventing fraud. 2008 BAR EXAM: Q: Terrazas de Patio Verde, a condominium building, has a value of P50 Million. The owner insured the building against fire with three (3) insurance companies for the following amounts: Northern Insurance Corp. 20M,Sounthern Insurance Corp.30M, Eastern Insurance Corp.50M. a. Is the owner's taking of insurance for the building with three (3) insurers valid? Discuss. b. The building was totally razed by fire. If the owner decides to claim from Eastern Insurance Corp. only P50 Million, will the claim prosper? Explain. A: (a). Taking out insurance covering the same property, same insurable interest and same risk

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with three insurance companies is “double insurance” recognized under sec 93 of ICP. However, in American Home Assurance Corp vs. Chua June 28, 1999, the court referred to the common inclusion of the other insurance clause in the fire insurance policies requiring disclosure of coinsurance of the same property with other insurers. (b) Insured can recover from Eastern Inssurance Corp up to the extent of his loss. However, Eastern may refuse to pay if the policy contains an “ other insurance clause” stipulating that non-disclosure of double insurance will avoid the policy. (Geagonia v. Country Bankers Insurance, 2/6/95). As there is no indication of a contractual prohibition on double or other insurance, all insurance contracts over the building are deemed valid and enforceable. The law prohibits double or over-recovery, not double insurance. Since eastern insured the property up 50% the total coverage, it is liable for only 50% of the total actual loss. Eastern Insurance Corp, is liable to the extent of its coverage but may recover one half of the total indemnity from the co-insurers in the proportion of 60% (Southern Insurance)- 40 % ( Northern Insurance)

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EFFECTS OF OVER-INSURANCE BY DOUBLE INSURANCE 1. Insured, unless the policy otherwise provide, may claim payment from the insurers in such order as he may select up to the amount for which the insurers are severally liable under their respective contracts. 2. Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum received by him under any policy without regard to the actual value of the subject matter insured. 3. Where the policy under which the insured claims is an unvalued policy, he must give credit, as against the full insurable value, for any sum received by him under the policy. 4. Where the insured receives any sum in excess of the valuation in case of a valued policy or the insurable value in case of an unvalued policy, he must hold such sum in trust for the insurers, according to their right of contribution among them; 5. In relation paragraph (4) – Each insurer is bound, as between himself and the other insurers to contribute ratably to the loss in proportion to the amount for which it is liable under Page 123

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his contract. ALSO REFERRED TO AS THE PRINCIPLE OF CONTRIBUTION – WHICH HAS ALREADY BEEN INCOPORATED IN ALMOST ALL POLICIES – that should there be other insurances covering the same property, the liability of the company would be limited to its ratable proportion of the loss or damage (Also known as CONTRIBUTION CLAUSE). TEST TO DETERMINE EXISTENCE OF DOUBLE INSURANCE Whether the insured, in case of happening of the risk, can directly benefited by recovering on both policies? If yes – there is double insurance. IS DOUBLE INSURANCE VALID? - It depends, if there is prohibition in the policy then it is not valid, but if there is no prohibition, it is valid provided it must follow the provisions of the law. DOUBLE OVER INSURANCE INSURANCE There must be One insurer is two or more sufficient. insurers. The total The value must amount of the always be in policies need excess of the not exceed the insurable BAR OPERATIONS 2011

value of insurable interest.

the interest;

REINSURANCE Occurs when an insurer procures a 3RD person to insure him against loss or liability by reason of such original insurance (Sec. 95). WHEN IS REINSURANCE COMPULSORY? 1. When a non-life insurer insured in any one risk or hazard an amount exceeding 20% of its net worth, the insurer needs reinsurance of the excess over such limit (Sec. 215 (1)). 2. When a foreign insurance company withdraws from the Philippines, it should cause its primary liabilities under policies insuring residents of the Philippines to be reinsured by another company authorized to transact an insurance business in the Philippines. DOUBLE INSURANCE VS. REINSURANCE DOUBLE REINSURANC INSURANCE E Insurer remains Insurer an insurer becomes the insured Subject matter is Subject matter property is the insurer’s risk or liability Same interest Different Page 124

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and risk is interest insured with risk another insured

and are

WHAT KIND OF CONTRACT IS REINSURANCE?  It is presumed to be a contract of indemnity against liability, and merely against damage (Sec. 97).  As a RULE, the reinsurer is not liable to the reinsured for a loss under an original policy if the reinsured is not liable to the original policyholder. EXTENT OF LIABILITY OF THE REINSURER? The liability of the reinsurer is measured by the liability of the reinsured to the original policy holder PROVIDED, it does not exceed the amount of reinsurance.  CLASSES OF INSURANCE MARINE INSURANCE Insurance against loss or damage to: (a) Vessels, craft, aircraft, vehicles, goods freight, cargoes, merchandise effects, disbursements, profits, moneys, securities, loses in action, evidences of debt, valuable papers, BAR OPERATIONS 2011

bottomry or respondentia interest and all other kind of property and interests therein, in respect to, appertaining to or in connection with any and all risks or perils of navigation, transit or transportation or while being assembled, packed, crated, baled, compressed, or similarly prepared for shipment or while awaiting shipment or during any delays, storage, transshipment or reshipment incident thereto; (b) Person or property in connection with or appertaining to marine, island marine, transit or transportation insurance, including liability for loss or in connection with the construction, repair, operation, maintenance, use of the subject matter of the insurance. (But not including life insurance, or surety bonds nor insurance against loss by reason of bodily injury to any person arising out of the ownership, maintenance, use of automobiles); (c) Precious stones, jewels, jewelry, precious metals whether in the course of transportation or otherwise;

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(d) Bridges, tunnels or other instrumentalities of transportation and communications (excluding buildings, their furniture and furnishings, fixed contents, and supplies held in storage), piers, wharves, docks, slips, and other aids to navigation and transportation including dry docks, marine railways, dams and appurtenant facilities for the control of waterways. AND – “Marine Protection and Indemnity Insurance” meaning insurance against, or against legal liability of the insured for loss, damage or expense incident to ownership, operation, chartering, maintenance, use, repair, or construction of any vessel, craft or instrumentality in use in ocean or island waterways, including liability of the insured for personal injury, illness or death or for loss or damage to the property of another person (Sec. 99). WHAT RISKS ARE INSURED AGAINST? - The basic risk insured against is commonly known as PERILS OF THE SEA. WHAT ARE NOT COVERED? BAR OPERATIONS 2011

(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 under ordinary conditions. 2008 BAR EXAM (IX –b) Q: On October 30, 2007, M/V Pacific, a Philippine registered vessel owned by Cebu Shipping Company (CSC), sank on her voyage from Hong Kong to Manila. Empire Assurance Company (Empire) is the insurer of the lost cargoes loaded on board the vessel which were consigned to Debenhams Company. After it indemnified Debenhams, Empire as subrogee filed an action for damages against CSC. b) Assume that the vessel was not seaworthy as in fact its hull had leaked, causing flooding in the vessel. Will your answer be the same? Explain. A: When the vessel is not seaworthy, it is an exception to the hypothecary principle in maritime commerce. To limit its liability to the amount of the insurance proceeds, the carrier has the burden of proving that the unseaworthiness of its vessel was not due to its fault or negligence. Page 126

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The failure to discharge such a heavy burden precludes application of the limited liability rule and the carrier is liable to the full extent of the claims of the cargo owners (Aboitiz Shipping v. New India Assurance Company, G.R. No. 156978, 02 May 2006). 2008 EXAM (IX –c) Q:c) Assume the facts in question (b). Can the heirs of the three (3) crew members who perished recover from CSC? Explain fully. A: Yes, because the crew members died while performing their assigned duties, aggravated by the failure of the ship owner to ensure that the vessel is seaworthy. Workmen’s compensation has been classified by jurisprudence as an exception to the hypothecary nature of maritime commerce, [Abueg v.San Diego, 77 Phil. 730 (1948)], especially in this case where the vessel was not seaworthy at the time it sank. WHAT PERILS ARE INSURED IN AN “ALL RISK POLICY” It is to be construed as creating a special insurance and extending to all risk than are usually contemplated and will cover all losses except such that may arise from intentional fraud, intentional misconduct, or that BAR OPERATIONS 2011

otherwise excluded. It may include all losses whether arising from a marine peril or not to include pilferage during a war (Filipino Merchant Insurance Co. vs. CA, 179 SCRA 638). NOTE: Inchamaree Clause – one that covers any loss other than a willful and fraudulent act of the insured and avoids putting upon the insured the burden of establishing that a loss was due to a peril within the policy’s coverage, whether arising from a marine peril or not provided the risk is not excluded; WHAT CONSTITUTES INSURABLE INTEREST IN OCEAN MARINE INSURANCE? 1. The owner of a vessel has insurable interest in the vessel such shall continue even if the vessel has been chartered by one who covenants to pay the owner the value of the vessel upon loss but in case of loss, the owner is liable only for the part of the loss which the insured cannot recover from the charterer. (Sec. 100) 2. The insurable interest of the owner of a ship hypothecated by bottomry is only the excess of its value over the amount secured by bottomry. (Sec. 101) 3. The owner of a vessel also has insurable interest in Page 127

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expected freightage, which according to the ordinary course of things he would have earned but for the intervention of a peril insured against or other peril incident to the voyage. (Sec. 102) ARE THERE PERSONS/PARTIES OTHER THAN THE OWNER WHO HAS INSURABLE INTEREST? YES; 1. One who has an interest in the thing from which profits are expected to proceed, has insurable interest on the profits (Sec. 105). 2. The charterer of a ship has insurable interest to the extent that he is liable to be damnified by its loss (Sec. 106). CONCEALMENT IN MARINE INSURANCE - A party is bound to communicate, in addition to what is required by section 28 (facts within his knowledge, material to the contract, other party has not the means of ascertaining, as to which party with a duty to communicate makes no warranty) information that he possesses, that are material to the risk AND, to state the EXACT and WHOLE TRUTH in relation to all matters that he represents, BAR OPERATIONS 2011

or upon inquiry discloses or assumes to disclose EXCEPT those that the insurer knows or those in the exercise of ordinary care, the other ought to know, and which the former has no reason to suppose him to be ignorant under Section 30 (Section 107); NOTE: That the rules on concealment in marine insurance are stricter as it is sufficient that the insured is in POSSESSION OF THE MATERIAL FACT, ALTHOUGH HE IS UNAWARE OF IT. A party is also bound to communicate, the information belief or expectation of a 3rd person, in reference to a material fact, is material. Note: under section 35 such is not required to be communicated in ordinary insurance (Sec. 108). PRESUMPTION OF A PRIOR LOSS Insured in marine insurance is presumed to have knowledge, at the time of insuring, or prior, if information might possibly reached him in the usual mode of transportation and the usual rate of communication (Sec. 109). EFFECT OF CONCEALMENT It exonerates the insurer from a loss resulting from the risks concealed as related to: Page 128

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(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 laws of foreign laws of trade; (d) the want of necessary documents ; (e) the use of false/simulated documents ORDINARY CONCEALMENT vs. MARINE INSURANCE ORDINARY INSURANCE

MARINE INSURANCE

Opinion or belief of a 3RD person or own judgment of the insured is not material and need not be communicated (Sec. 35) A causal connection between the fact concealed and cause of loss is not necessary for the insurer to rescind;

Belief or expectation of 3RD person in reference to a material fact is material and has to be communicated; The concealment of any of the matters stated in section 110 merely exonerates the insurer from loss, if the results from the fact concealed;

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REPRESENTATION IN MARINE INSURANCE: If the representation is intentionally false in any material respect, or, in respect of any fact on which the character and nature of the risk depends, the insurer may rescind (Section 111). But the eventual falsity of a representation as to an expectation does not in the absence of fraud avoid the contract (Sec. 112). WHAT ARE THE IMPLIED WARRANTIES IN MARINE INSURANCE? 2000 BAR EXAM (IX – b) 1. In every contract of marine insurance upon a ship or freight, freightage or upon anything which is the subject of marine insurance, there is an implied warranty that the ship is sea worthy (Sec. 113).  A ship is sea worthy when it is reasonably fit to perform the service and encounter the ordinary perils of the voyage, contemplated by the parties (Sec. 114). Note that it is relative and is made to depend on the circumstances.

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 The implied warranty of seaworthiness 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, it is 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 (Sec. 115). (c) where different portions of the voyage contemplated in the policy differ in respect to the things requisite to make BAR OPERATIONS 2011

the ship seaworthy, I which case it must be seaworthy at the commencement of each portion (Sec. 117). WARRANTY OF SEAWORTHINESS EXTENDS TO: The warranty of seaworthiness extends not only to the condition of the structure of the ship, but it requires that: (a) it be properly laden or loaded with cargo; (b) is provided with a competent master, sufficient number of officers and seamen; (c) it must have the requisite equipment and appurtenances like ballast, cables, anchors, cordage, sails, food, water, fuel, lights and other necessary and proper stores and implements for the voyage (Sec. 116).  Note that when a ship becomes unseaworthy during the voyage – it will not avoid the policy – as long as – there is no unreasonable delay in repairing the defect. Otherwise – the insurer is exonerated on the ship or the ship owners’ interest from any Page 130

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liability from any loss arising therefrom (Sec. 118). Hence, if loss is not one due to the defect or peril was not increased by the defect insurer is liable.  Also, while a ship may be seaworthy for purposes of insurance on it, it may by reason of being unfitted to receive cargo, be unseaworthy for the purpose of insurance on the cargo (Sec. 119). 2. 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 (Sec. 120). This warranty arises only when nationality or the neutrality of the vessel or cargo is expressly warranted. 3. That the vessel shall not make any improper deviation from the intended voyage. DEVIATION: It is a departure from the course of the voyage as defined by Section 121 and 122 or an unreasonable delay in pursuing the voyage or the commencement BAR OPERATIONS 2011

of an entirely different voyage. (Sec. 123) WHEN IS DEVIATION PROPER (2005 BAR) A vessel can properly proceed to a port other than its port of destination in the following cases: 1. When caused by circumstances over which neither the master or the owner of the ship has any control; 2. When necessary to comply with a warranty, or to avoid a peril, whether or not the peril is insured against; 3. When made in good faith, and upon reasonable grounds of belief In the necessity to avoid peril; 4. When made in good faith for the purpose of saving human life or relieving another vessel in distress. (Sec. 124) 2005 BAR EXAM (N0. XIV -1 - a) Q: On a clear weather, M/V Sundo, carrying insured cargo, left the port of Manila bound for Cebu. While at sea, the vessel encountered a strong typhoon forcing the captain to steer the vessel to the nearest island where it stayed for seven days. The vessel ran out of Page 131

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provisions for its passengers. Consequently, the vessel proceeded to Leyte to replenish its supplies. a) Assuming that the cargo was damaged because of such deviation, who between the insurance company and the owner of the cargo bears the loss? Explain. A: The Insurance company should bear the loss. Since the deviation was cured by a strong typhoon, it was caused by circumstances beyond the control of the captain, and also to avoid a peril whether or not insured against. Deviation is therefore proper. (Sec. 145(a)) CONSEQUENCE OF IMPROPER DEVIATION Insurer is not liable for any loss happening to the thing insured subsequent to an improper deviation (Sec. 126). 4. That the vessel does not or will not engage in any illegal venture; LOSS IN MARINE INSURANCE  KINDS OF TOTAL LOSSES: Actual or Constructive

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(1) If it is an Actual Total Loss it may be caused by: a. total destruction of the thing insured; b. the irretrievable loss of the thing which renders it valueless to the owner for the purpose that he held it; c. any other event which effectively deprives the owner of the possession at the port of destination of the thing insured (Sec. 130).  An actual total loss can also be presumed from the continued absence of the ship without being heard of (section 132). The length of time which is sufficient to raise these presumption depends on the circumstances of the case; (2) It is a constructive total loss when the person insured is given a right to abandon under Section 139 (Sec. 131). 2005 BAR EXAM (N0. X -1- a)

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Q: M/V Pearly Shells, a passenger and cargo vessel, was insured for P40,000,000.00 against “constructive total loss.” Due to a typhoon, it sank near Palawan. Luckily, there were no casualties, only injured passengers. The shipowner sent a notice of abandonment of his interest over the vessel to the insurance company which then hired professionals to afloat the vessel for P900,000.00. When re-floated, the vessel needed repairs estimated at P2,000,000.00. The insurance company refused to pay the claim of the shipowner, stating that there was “no constructive total loss.” a) Was there “constructive total loss” to entitle the shipowner to recover from the insurance company? Explain. A: There was constructive total loss. When the vessel sank, it was likely that it would be totally lost because of the improbability of recovery. (Arnold’s Law of Marine Insurance and Average, 16th ed., Vol. II, pp. 954-955)

P2,900,000.00 which does not constitute more than ¾ the value of the vessel.

Suggested Alternative Answer: There was no constructive total loss. The loss is not more than ¾ the value of the vessel which was insured for P40,000,000.00. The cost of refloating is P900,000.00 and the needed repairs amount P2,000,000.00, or a total of only

ABANDONMENT – is the act of the insured by which, after a constructive total loss, he desires to the insurer the relinquishment in its favor his interest in the thing insured (Sec. 138).

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THE DOCTRINE OF LIMITED LIABILITY – [when not applicable] – The doctrine of limited liability under Article 587 of the Code of Commerce is not applicable to the present case. This rule does not apply to situations in which the loss or the injury is due to the concurrent negligence of the ship owner and the captain. It has already been established that the sinking of the M/V Central Bohol had been caused by the fault or negligence of the Ship Captain and the crew, as shown by the improper stowage of the cargo logs. “Closer supervision on the part of the ship owner could have prevented this fatal miscalculation.” As such, the ship owner was equally negligent. It cannot escape liability by virtue of the limited liability rule. (Central Shipping Company, Inc. v. Insurance Company of North America, Sept. 20, 2004, G.R. No. 150751)

A person insured by a contract of marine insurance may abandon the thing insured, or any Page 133

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particular portion thereof separately valued by the policy, or otherwise separately insured and recover a total loss – when the cause of loss is a peril insured against if:

the loss but, where the information is of doubtful character, the insured is entitled to a reasonable time to make an inquiry (Sec. 141).

 more than ¾ thereof in value is actually lost or would have to be expended to recover it form the peril insured against.

HOW NOTICE OF ABANDONMENT IS MADE 2005 BAR EXAM (N0. X - 1- b)

 if it is injured to such extent as to reduce its value by more than ¾ of value.

By giving notice, oral or written notice to the insurer but if orally given, a written notice of such must be submitted within seven days from giving oral notice (Sec. 143). The notice must be explicit and specify the particular cause of the abandonment but need start only enough to show that there is probable cause therefore and need not be accompanied by proof of interest or of loss (Sec. 144). The requirement as the explicitness of the notice is due to the fact that abandonment can only be sustained upon the cause specified in the notice (Sec. 145).

 if the thing injured is a ship and 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.  if the insured is freightage or cargo – and the voyage cannot be performed – nor another ship cannot be procured by the master – within a reasonable time 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 abandoned (Sec. 139). Abandonment must neither be partial nor conditional (Sec. 140). Hence, it must be total and absolute; and must be made within a reasonable time after receipt of reliable information of BAR OPERATIONS 2011

EFFECTS OF ABANDONMENT (1) It is equivalent to a transfer by the insured of his interest to the insurer, with all the chances of recovery and indemnity (Sec. 146) Note though, if the insurer pays for a loss as if it were an actual total loss, he is entitled to whatever may remain of the thing insured, Page 134

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or its proceeds or salvage as if there has been a formal abandonment. Here the insurer has opted to pay for total actual loss notwithstanding the absence on actual abandonment; (2) Acts done in good faith by those who were agents of the insured in respect to the thing insured subsequent to the loss are at the risk of the insurer and for his benefit (Sec. 148). The agents of the insured become agents of the insurer. This retroacts to the date of the loss when abandonment is effectively made; EFFECTIVITY OF ABANDONMENT: Abandonment becomes effective upon the acceptance of the insurer. If it is not accepted despite validity, the insured may nevertheless claim an actual total loss. LIABILITY FOR AVERAGES AVERAGE– is any extraordinary or accidental expense incurred during the voyage for the preservation of the vessel, cargo, or both and all damages to the vessel or cargo from the time it is loaded and the voyage commenced until it ends and the cargo is unloaded. KINDS OF AVERAGES: BAR OPERATIONS 2011

(a) Particular or simple average is a damage or expense caused to the vessel, cargo, or which has not inured to the common benefit and profit of all persons interested in the cargo or the vessel. This is borne ordinarily by the owner of the vessel or cargo that gives rise to the expenses or suffered the damage. (b) General or gross average is an expense or damage suffered deliberately in order to save the vessel or its cargo or both from real and known risk. Thus, all persons having an interest in the vessel and cargo or both at the occurrence of the average shall contribute. IN CASE OF GENERAL AVERAGE LOSS The insurer is liable for the loss falling upon the insured, though a contribution in respect to the thing insured when required to be made by him towards a general average loss called for a peril insured against but liability is limited to the proportion of the contribution attaching to his policy value where this is less than the contributing value of Page 135

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the thing insured (Sec. 164). Meaning that the insured can hold his insurer liable for contribution up to the value of the policy; RIGHT OF SUBROGATION When a person injured in a contract of marine insurance has a demand against the others for contribution, he may claim the whole loss from his insurer subrogating the insurer to his own right to contribution but no such claim can be made upon the insurer if: (a) There is separation of the interest liable to contribution; (b) When the insured having the right and opportunity to enforce contribution from others, has neglected or waived the exercise of the right (Sec. 165). Meaning that the insured has a choice of recovery on the happening of a general average loss. They are: (1) Enforcing the contribution against interested parties; or (2) Claiming from the insurer. If it be the latter, subrogation takes place;

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MEASURE OF INDEMNITY IN MARINE INSURANCE IF THE POLICY IS VALUED; 1. A valuation in the policy of marine insurance is exclusive between the parties thereto in the adjustment of either a partial or total loss, if the insured has some interest at risk and there is no fraud on his part. If there is fraud in valuation, it entitles the insurer to rescind as it is an exception as to conclusiveness (Sec. 156); 2. If however, hyphotecated by the bottomry or respondentia – before insurance and without knowledge of the person securing it – he may show the real value; 3. An insurer is liable upon a partial loss – only for such proportion of the amount insured by him – as the loss bears to the whole interest of the insured (Sec. 157). The effect is that the insured is deemed a co-insurer if the value of the insurance is less than the value of the property. This applies even in the absence of a stipulation in the contract and is also known as the average clause. The two requisites for the application of the average clause: a. b.

insurance is for less than actual value; the loss is partial

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stipulated (Sec. 171-172). In life insurance, there is none also as value is fixed in the policy (Sec. 183). 4. In case profits are separately insured in a contract of marine insurance (see Sec. 105) , the insured can recover in case of a loss (and under Sec. 160, there is a conclusive presumption of a loss from the loss of the property out of which they were expected to arise, and the valuation fixes their amount), a proportion of such profits equivalent to proportion of the value of the property lost bears to the value of the whole (Sec. 158). IF THE POLICY IS OPEN (a) The value of the ship is the value at the beginning of the risk, including all articles or charges which add to its permanent value or which are necessary to prepare it for the voyage insured; (b) The value of the cargo is its actual cost to the insured, when laden on board where the cost cannot be ascertained, its Market Value at the time and place of lading. Adding the charges incurred in purchasing and placing it on board – but without reference to any loss incurred in BAR OPERATIONS 2011

raising money for its purchase or any DRAWBACK on its EXPROPRIATION or FLUCTUATION of the market at the port of destination or expenses incurred on the way or on arrival; (c) Value of freightage is the gross freightage, exclusive or primage without reference to the cost of earning it; (d) The cost of insurance is in each case to be added to the value thus estimated (Sec. 161). IF THE CARGO INSURED AGAINST PARTIAL LOSS If it arrives at the port of destination in a damaged condition, the loss of the insured is deemed to be the same proportion of the value which the market price at that port of the thing so damaged bears to the market price it would have brought if sound (Sec. 162). Meaning if reduction in value is 1/5, then amount of recovery on the insurance is also 1/5. FIRE INSURANCE  Insurance against fire includes loss or damage due to lightning, windstorm, tornado, earthquake or other Page 137

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allied risks when such risks are covered by extensions to the fire insurance policy or under separate policies (section 167). Hence, while it is not limited to loss or damage due to fire, coverage as to other risks is not automatic. 2001 BAR EXAM (N0.XVII) Q: JQ, owner of the condominium unit, insured the same against fire with XYZ Insurance Corp. and made the loss payable to his brother. MLQ. In case of loss by fire of the said condominium unit, who may recover on the fire insurance policy? State the reasons for your answer? A: JQ can recover on the fire insurance policy for the loss of the said condominium unit. He has the insurable interest as ownerinsured. As beneficiary in the fire insurance policy, MLQ cannot recover on the fire insurance policy. For the beneficiary to recover on the fire or property insurance policy, it is required that he must have insurable interest in the property insured. In this case, MLQ does not have insurable interest in the condominium unit. FIRE DEFINED as

In insurance, it is defined the active principle of

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burning, characterized by heat and light combustion. Combustion without visible light or glow is not fire ALTERATION DEFINED 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 (Sec. 168). HOW IS VALUATION MADE: (1) Whenever the insured would like to have a valuation stated in a policy insuring a building or structure against fire, it may be made by an independent appraiser, who is paid by the insured and the value may be fixed between the insurer and the insured; (2) Subsequently, the clause is then inserted in the policy that said valuation has thus been fixed; (3) In case of loss, provided there is no change increasing the risk without the consent of the insured or fraud on the part of the insured, the insurer will pay the whole amount so insured and stated in the policy is paid. If it is a partial loss, the whole amount of the partial loss Page 138

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is paid. In case there are 2 or more policies, each shall contribute pro-rata to the total or partial loss but the liability of the insurers cannot be more than the amount stated in the policy; (4) Or the parties may stipulate that instead of payment, the option to repair, rebuild or replace the property wholly or partially damaged or destroyed shall be exercised (Sec. 172). 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. 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 nonlife companies and other 1993 and 1994 BAR EXAMS: Sun Insurance Office vs. CA July 17, 1992 X was issued a personal accident insurance for P200,000. Two months later, he died of a bullet wound in his head. He was BAR OPERATIONS 2011

playing with his hand gun from which he removed the magazine. He pointed his gun to his temple and fired. The insurance company refused to pay the beneficiary. Was there suicide or accident? SC: 1. X was negligent but it should not prevent the beneficiary from recovery because there is nothing in the policy that exempts the insurer of the responsibility to pay indemnity if the insured is shown to have contributed to his own accident.t 2. The death is accidental. Accident happens by chance without intention or design and which is unexpected or unforeseen. SURETYSHIP  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 3RD party called the obligee (Sec. 175). Includes – official recognizance’s, bonds or undertakings issued by any company under Act No. 536, as amended by act no. 2206 Page 139

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(Government transactions – by authorized companies) LIABILITY OF THE SURETY It is joint and several (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 – obligee (Sec. 176). IS A SURETYSHIP CONTRACT VALID AND BINDING WHERE THE PREMIUM HAS NOT YET BEEN PAID? Generally, payment of the premium is a condition precedent. Hence the bond is not valid. An exception is when it is issued and accepted by the obligor, it is valid despite non payment of the premium (Sec. 177). SURETY vs. GUARANTY SURETY GUARANTY Assumes liability as a regular party to the agreement.

Primarily liable.

Guarantor’s liability depends on an independent agreement to pay if primary debtor fails to pay Secondarily liable.

Not entitled to Entitled to exhaustion. exhaustion. BAR OPERATIONS 2011

NON-NECESSITY OF A DEMAND ON THE SURETY – Demand on the surety is not necessary before bringing the suit against them. On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal’s default. (Intra-Strata Assurance Corporation, Et Al. v. Republic of the Philippines, Etc., Jul. 9, 2008 G.R. No. 156571) LIFE INSURANCE  Is insurance on human lives and insurance appertaining thereto or connected therewith (Sec. 179) WHEN IS IT PAYABLE An insurance upon life may be made payable upon: (a) death of the person; or (b) his surviving a specified period; or (c) otherwise, contingently on the continuance or cessation of life; COMMON KINDS:  WHOLE LIFE/ORDINARY LIFE/STRAIGHT LIFE: premiums are payable for life and the insurer agrees to pay the face value upon the death of the insured.

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 LIMITED PAYMENT LIFE: insured pays premiums for a limited period after which he stops with a guarantee by the insurer that upon death the face amount is to be paid – if death occurs while payment is not complete – beneficiary acts face amount.  TERM POLICY: insurer is liable only upon death of the insured within the agreed term or period. If insured survives the insurer is not liable.  ENDOWMENT : protection is for a limited period, if the insured is still alive at the end of the period, the value of the policy is paid to him. If he dies before the end period, it is paid to the beneficiaries.  ANNUITY: where the insured or a named person/s is paid a sum or sums periodically during life or a certain period (note that contracts for the payment of endowment or annuities are considered as life insurance contracts). DISTINGUISHING LIFE INSURANCE FROM PAYMENT OF ANNUITY (1) In life insurance, it is payable upon the death of the insured, while in annuity, it is payable during the lifetime of the annuitant; (2) In life insurance, the premium is paid in BAR OPERATIONS 2011

installments, while in annuity, annuitant pays a single premium; (3) In life insurance, there is lump sum payment upon death, while in annuity, annuities are paid until death; WHAT RISKS ARE COVERED? (1) Generally - all causes of death are covered unless excluded by law, by policy or public policy. (2) Suicide, if committed after the policy has been in force for a period of two years from date of issue or last reinstatement unless policy provides a shorter period but it is nevertheless compensable if committed in the state of insanity regardless of date of commission (Sec. 180-A) IS A LIFE INSURANCE POLICY TRANSFERABLE OR ASSIGNABLE? Yes, it may pass by transfer, will or succession to any person, whether he has insurable interest or not. (Sec. 181) IS NOTICE TO THE INSURER OR TRANSFER OR BEQUEST REQUIRED? It is not necessary to preserve the validity of the policy unless thereby expressly required (Sec. 181) Page 141

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IS THE CONSENT OF THE BENEFICIARY REQUIRED? Yes, if he designated as an irrevocable beneficiary as he has acquired a vested right; BUSINESS INSURANCE REQUIREMENTS FOR A CERTIFICATE OF AUTHORITY FROM THE INSURANCE COMMISSION: (a) Qualified by Philippines Laws to transact insurance business; (b) Has a name that is not in anyway similar to another company; (c) If organized as a stock corporation, it should have a paid up capital of no less that Php5,000,000.00; (d) If it is organized as a mutual company (one whose capital funds are not contributed by stockholders but by policy holders) it must have available cash assets of at least Php5,000,000.00 above all liabilities for losses reported, expenses, taxes, legal reserves of all outstanding risks, and the contributed surplus fund equal to the amounts required of stock corporations (Php1,000,000.00 if a life insurance company or Php500,000.00, if a non life insurance company). BAR OPERATIONS 2011

(e) If a foreign insurance company, it must appoint a resident agent, deposit securities and maintain a legal reserve (Sec. 184-193). COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE  It is to provide protection or coverage to answer for bodily injury or property damage that may be sustained by another arising from the use of motor vehicle. Please note though that what is now compulsory is death of bodily injury arising from motor vehicle accidents as per amendment to the insurance code by PD 1814 and PD 1455 brought about by insurance losses due to padded claims for property damage. Hence, property damage is now optional; DISTINGUISHED FROM OWN DAMAGE COVERAGE AND COMPREHENSIVE MOTOR VEHICLE INSURANCE: (a) Third party liability answers for liabilities arising from death or bodily injury to 3RD persons or passengers. (b) Own damage insurance answers for reimbursement of the cost of repairing the Page 142

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damage to vehicle of the insured. (c) Comprehensive insurance answers for all liabilities/damages arising from the use/operation of a motor vehicle it includes third party own damage, theft and property damage. WHEN DOES THE LIABILITY OF THE INSURER ACCRUE? The occurrence of an injury for which the insured may be liable immediately gives rise to insurer liability (Shafer vs. Judge, 167 SCRA 386). CANCELLATION OF THE POLICY (a) By the insurer – requires written notice to motor vehicle owner/land transportation operator at least 15 days prior to intended effective date. If so canceled, the Land Transportation Office may order the immediate confiscation of license plates unless it receives a new valid insurance/surety/proof of cash deposit or revival by endorsement of the cancelled policy (Sec. 130); (b) By the insured – the motor vehicle owner/land transportation operator BAR OPERATIONS 2011

shall secure a similar policy or surety before the cancelled policy/surety ceases to be effective or make a cash deposit and file the same or proof thereof with the Land Transportation Office (Sec. 381). PAYMENT OF CLAIMS A claim for payment must be filed without any unnecessary delay, within 6 month from the date of accident by giving written notice setting forth the nature, extent and duration of the injuries as certified by a duly licensed physician (Sec. 384). WHAT IS NO FAULT INDEMNITY? A no fault indemnity claim is a claim for payment for death or injury to a passenger of 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 Php5,000.00; (b) the necessary proof of loss under oath to substantiate the claim is submitted AGAINST WHOM IS THE PAYMENT CLAIMED Page 143

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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; INTERPRETATION OF THE AUTHORIZED DRIVER CLAUSE (1991 Bar Exams) 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; NOTE THE FOLLOWING JURISPRUDENCE: (1) If license is expired, person is not authorized to operate a motor BAR OPERATIONS 2011

(2)

(3)

(4)

(5)

vehicle (Tarco Jr. vs. Phil Guaranty, 15 SCRA 313) Issued a temporary operators permit or a temporary vehicle receipt, a person is authorized to operate a motor vehicle, but if it has expired, it is as if he has no license (Guttierez vs. Capital Insurance, 130 SCRA 618, PEZA vs. Alikpala, 160 SCRA 31) A tourist with license but in the country for more than 90 days, is not authorized to operate a motor vehicle because it is as if he has no license (Strokes vs. Malayan, 127 SCRA 766) A drivers license that bears all the earmarks of a duly issued license is presumed genuine. A license is not necessary, where the insured himself is the driver (Paterno vs. Pyramid Insurance, 161 SCRA 677, 1986 BAR)

BAR EXAM; 1996 Q: 1.While driving his car, X sideswiped A causing injuries to the latter. A sued X and the third party liability insurer for the damage sustained by A. 2. The insurance company moved to dismiss the complaint contending that theliability of X Page 144

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has not yet been determined with finality. Is the contention of the insurance company correct? May the insurer be held solidarily liable with X A: No. When an insurance policy insures directly against liability, the insurer’s liability accrues immediately upon the occurrence of the injury. No. The insurer cannot be held solidarily liable with X because its liability is based on a contract while that of X is based on torts. (Vda. De Maglana vs. Consolacion, August 6, 1992) COMPREHENSIVE VEHICLE INSURANCE 2000 Bar Exam)

MOTOR (1993 &

The liability of the insurance company s direct and solidary with the operator but only up to the amount stated in the policy and accrues immediately upon the occurrence of the accident. Any amount awarded beyond the amount stated in the policy is the sole responsibility of the carrier. NON-FAULT CLAUSE IN COMPULSORY MOTOR VEHICLE INSURANCE POLICY (2000 Bar Exam) Proof of fault or negligence is not necessary for the payment of any claim for death or injury to BAR OPERATIONS 2011

a passenger or to a third party. The maximum amount of indemnity is P 10, 000.00 upon submission of death certificate, medical certificate and police report. The purpose is in order to give immediate assistance to the victim of motor vehicle accidents and/or the dependents specially if they are poor, regardless of the financial capability of the owner of the motor vehicle or operator responsible for the accident. This does not include property damage. NECESSITY TO REGULATE INSURANCE COMPANIES COVERING PUBLIC UTILITY VEHICLES The present case shows a clear public necessity to regulate the proliferation of such insurance companies. Because of the PUV operators’ complaints, the LTFRB thus assessed the situation. It found that in order to protect the interests of the riding public and to resolve problems involving the passenger insurance coverage of PUV’s, it had to issue Memorandum Circular No. 2001001 accrediting PAMI and PAIC II as the two groups allowed to participate in the program. Memorandum Circular No. 2001001 required that “[a]ll public utility vehicles whose LTO license plate, as per latest LTO Official Page 145

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Receipt, with an EVEN middle number (0, 2, 4, 6 and 8) shall be insured with UCPB insurance (PAMI) while those with an ODD middle number (1, 3, 5, 7 and 9) shall be insured with Great Domestic Insurance (PAIC II) x x x .” TRANSPORTATION LAWS COMMON CARRIERS (Arts. 1732-1766, New Civil Code) Common Carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public. Transportation defined. a contract of transportation is one whereby a certain person or association of persons obligate themselves to transport persons, things, or news from one place to another for a fixed price Classification: 1. As to object: (1) things; (2) persons; (3) news 2. As to place of travel: (1) land; (2) water; (3) air Parties to contract transportation: (1) shipper or consignor. (2) carrier or conductor. BAR OPERATIONS 2011

of

(3) consignee Common Private Carrier Carrier As to Availability Holds himself out for all people indiscriminat ely

Contracts with particular individuals or groups only As to require Diligence Extraordinary Ordinary Diligence Diligence As to regulation Subject to Not subject state to state regulation regulation Stipulation limiting liability Parties may Parties may agree on limit the limiting the carrier’s carrier’s liability, liability provided it except when is not provided by contrary to law morals or good customs Exempting circumstances Prove Caso extraordinary forfuito, Art. diligence and 1174 NCC Art.1734,NCC Presumption of Negligence There is a No presumption presumptio of fault or n of fault or negligence Negligence Governing law Page 146

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Law Common Carriers

on Law on obligations and contracts (2002 Bar exams) Test for a common carrier: 1. He must be engaged in the business of carrying goods for others as a public employment, and must hold himself out as ready to engage in the transportation of goods for persons generally as a business, and not a casual occupation. 2. He must undertake to carry goods of the kind to which his business is confined. 3. He must undertake to carry by the methods by which his business is conducted, and over his established roads. 4. The transportation must be for hire. The true test is whether the given undertaking is a part of the business engaged in by the carrier which he has held out to the general public as his occupation rather than the quantity or extent of the business actually transacted, or the no. and character of the conveyances used in the employment (the test is therefore the character of the business actually carried on by the carrier. Characteristics carriers: BAR OPERATIONS 2011

of

common

(1) The common carrier undertakes to carry for all people indifferently; (2) The common carrier cannot lawfully decline to accept a particular class of goods for carriage to the prejudice of the traffic in those goods Exception : for some sufficient reason, where the discrimination in such goods is reasonable and necessary (substantial grounds) (3) No monopoly is favored - the Commission has the power to say what is a reasonable compensation to the utility and to make reasonable rules and regulations for the convenience of the traveling public and to enforce them (4) Public convenience - for the best interests of the public The law prohibits unreasonable discrimination by common carriers.-- The law requires common carriers to carry for all persons, either passengers or property, for exactly the same charge for a like or contemporaneous service in the transportation of like kind of traffic under substantially similar circumstances or conditions. The law prohibits common carriers (CC) from subjecting any person, etc. or locality, or any kind of traffic, to any undue or unreasonable prejudice or discrimination whatsoever. Page 147

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Exception: When the actual cost of handling and transporting is different, then different rates may be charged Determination of justifiable refusal: This involves a consideration of the following: 1. suitability of the vessels of the company for the transportation of such products; 2. reasonable possibility of danger or disaster, resulting from their transportation in the form and under the conditions in which they are offered for carriage; 3. the general nature of the business done by the carrier; 4. all the attendant circumstances which might affect the question of the reasonable necessity for the refusal by the carrier to undertake the transportation of this class of merchandise. What is the DILIGENCE required by common carriers? Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case. Extraordinary diligence lasts from the time the cargoes are loaded in BAR OPERATIONS 2011

the vessel until they are discharged and delivered to the consignee. Air carriers can terminate services of pilots for serious misconduct and drunkenness because of its extraordinary diligence. LIABILITY OF COMMON CARRIERS: The common carrier, is at all times, required to observe extraordinary diligence with respect to transport of goods. 1. To bring passengers safely to his place of destination. He is obliged to carry passengers safely as far as human care and foresight can provide, using the utmost diligence of a very cautious person with due regard for all circumstances. In case of death or injury, the common carriers are presumed to have been at fault or negligent in transporting the passengers unless they prove that they observed extraordinary diligence. 2. To transport the goods/ cargoes safely to the point of destination if there is loss or damage to the goods/cargoes, immediately a presumption of negligence arises that the loss/ damage to the goods/ cargoes was due to the negligence of the common carrier. The Page 148

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shipper may only prove that the goods arrived in a damaged condition or that they did not arrive at all. LOADSTAR SHIPPING CO., INC VS. PIONEER ASIA INSURANCE CORP.Jan 24, 2006 A common carrier is required to observe extraordinary diligence in the vigilance over the goods it transports. I. VIGILANCE OVER THE GOODS RULES governing common carrier’s LIABILITY over Goods: General RULE: Common carriers are responsible for the loss, destruction, or deterioration of the goods, UNLESS the same is due to any of the following causes only: 1) Flood, storm, earthquake, lightning, or other natural disaster or calamity; 2) Act of the public enemy in war, whether international or civil; 3) Act or omission of the shipper or owner of the goods; 4) The character of the goods or defects in the packing or in the containers; 5) Order or act of competent public authority. (Art. 1734) The CC may absolve itself from liability by proving any of the following DEFENSES: (2002 Bar exams) A) That the CC encountered: a. An act of God; BAR OPERATIONS 2011

— there must have been no delay on the part of the common carrier. Otherwise, if delayed and not for good reason, then it shall be held liable notwithstanding the fact that all the subsequent requisites were present. — must be an unforeseen event or an event which cannot be avoided — The carrier must have exercised extraordinary diligence before, during, and after the time of the accident. —The proximate cause must not be committed by the carrier. If the proximate cause of the event is caused by the carrier, then he cannot invoke the act of God defense. Under the rule on Contributory Negligence, if the negligence attributable to carrier is not proximate in character, the carrier shall be responsible, although such liability shall be mitigated. b. Act of public enemy in war; c. Act by a competent public authority; d. Acts/omissions of the shipper or his agent; e. The goods or the packaging is inherently defective. Even if the loss, destruction, or deterioration of the goods should be caused by the character of the Page 149

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goods, or the faulty nature of the packing or of the containers, the common carrier must exercise due diligence to forestall or lessen the loss. EXEMPTING CAUSE REQUISITES for natural disaster or calamity – 1. The natural disaster must have been the proximate cause of the loss 2. It must have been the only cause of the loss 3. The common carrier must have exercised due diligence to prevent or minimize before , during and after the natural disaster 4. The common carrier has not negligently incurred delay in transporting the goods REQUISITES for act of public enemy 1. The act of public enemy must have been the proximate of the loss 2. It must have been the only cause of the loss 3. The common carrier must have exercised due diligence to prevent or minimize before , during and after the act of public enemy in war. REQUSITE FOR act or omission of Shipper 1. That the act or omission of the shipper /owner of the goods must have been the proximate cause of the loss BAR OPERATIONS 2011

2. That it must have been the only cause of the loss. REQUSITES for character of goods , fault in packing or containers1. That the loss , destruction or deterioration was caused by the character of the goods ; or the faulty nature of the packing /containers 2. That the common carrier had exercised due diligence to forestall or lessen the loss. REQUISTES for the act of public authority – 1. The common carrier must prove that the public authority had the power to issue the order for the destruction / seizure of the goods. B.) Another defensive strategy to escape liability is to invoke that it exercised extraordinary diligence to prevent or minimize the loss at the time the accident occurred. Negligence is the failure to observe due diligence with respect to the circumstances at hand. Contributory Negligence is the failure to observe due diligence that an ordinary or prudent man undertakes in relation to the negligence of another.

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When does the carrier’s responsibility over the goods arise? The carrier shall be liable the moment the goods arrive in his possession whether actual or constructive, until such time that the carrier delivers the same to the consignee OR the consignee has been informed of the arrival of the goods and the consignee had reasonable time to remove the same. Under maritime laws, the responsibility of the carrier ends when the goods were transmitted by the carrier to the customs arrastre operator. Recall that before the goods are delivered to the consignee, the state has the responsibility to ensure that the goods being brought in are in accordance with the law. EFFECT: The carrier would no longer be liable. The succeeding relationship would be between the consignee and the arrastre operator, the relationship governing them would be akin to a contract of Deposit. There is already an existing Contract of carriage when the carrier took possession of the cargo by placing it on a lighter or barge manned by its authorized employees. (COMPANIA MARITIMA vs. INSURANCE COMP )

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A bill of lading that was issued covering certain shipment which contained a provision that the carrier does not assume liability for any loss /damage to the goods once they have been under the custody of the custom or other authorities or when they have been delivered at ship’s tackle have been considered valid , because it was held that it is not contrary to morals and public policy ; said stipulation is clear and have been adopted to mitigate the responsibility of the common carrier. (LU DO vs. BINAMIRA) Stoppage in Transitu is the right of the unpaid seller who has parted with the possession of the goods to stop them in transit, when the buyer of goods is or becomes insolvent. Requisites: 1. Seller must be an unpaid seller; 2. Goods must be in transit; 3. Buyer must be in a state of insolvency; EFFECT: Once the right is exercised, the common carrier becomes a mere warehouseman. In the event that the UNPAID Seller exercises its right of stoppage in transitu , the carrier thereafter holds the goods in the capacity of an ordinary bailee or warehouseman and shall be liable Page 151

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only as such , upon the theory that the exercise of the right by the unpaid seller , such terminates the contract of carriage. A STIPULATION LIMITING LIABILITY IS VALID PROVIDED THAT it be: (2002 bar Exam) 1. In writing signed by both parties 2. Supported by a valuable consideration other than the service rendered by common carrier 3. Reasonable, just and not contrary to public policy SOME VALID STIPULATIONS LIMITING CARRIER'S LIABILITY: 1. Account of strikes or riot; 2. Value of the goods appearing in bill of lading UNLESS shipper declares a greater value; 3. Contract fixing the sum that may be recovered. VOID STIPULATIONS LIMITING CARRIER'S LIABILITY (2002 bar exams) 1. that the goods are transported at the risk of the shipper; 2. that the shipper is not liable for any loss or destruction of the goods; 3. that the common carrier need not observe any diligence in the custody of the goods; 4. that the common carrier shall exercise a degree of diligence

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less than that of a good father of a family; 5. that the common carrier shall not be responsible for any acts of its employee; 6. that the common carrier’s liability for acts committed by thieves, or of robbers who do not act with grave or irresistible threat, violence or force, is dispensed with or diminished; 7. that the common carrier is not responsible for the loss, destruction, or deterioration of goods on account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the contract of carriage. A stipulation that the common carrier's liability is limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding. A contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the goods is valid, if reasonable and just under the circumstances, and has been fairly and freely agreed upon. The law of the country to which the goods are to be transported governs the liability of the common carrier in case of loss, destruction or deterioration.

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The provisions of articles 1733 to 1753 shall apply to the passenger's baggage which is not in his personal custody or in that of his employee. As to other baggage, the rules in articles 1998 and 2000 to 2003 concerning the responsibility of hotel-keepers shall be applicable. Fire may not be considered as a natural disaster or calamity. It does not fall within the category of act of God UNLESS caused by lighting or by natural disaster or calamity. It may even be caused by actual privy or fault of the carrier. (EASTERN SHIPPING vs. IAC) The Civil Code provisions on Common carrier shall not be applied when the carrier is not acting as such but as a private carrier. The stipulation in the charter party absolving the owner from liability for loss due to the negligence of its agent would be void only if strict public policy governing common carriers are applied. Such policy has no force when the public at large is not involved, as in the case of a ship totally chartered for the use of a single party (HOME INSURANCE vs. AMERICAN STEAMSHIP) In case where the Common carrier w/o just cause1. Delays the transportation of goods BAR OPERATIONS 2011

2. Changes the stipulated route / usual route The annulment of the agreement limiting the carrier’s liability is no longer necessary; The carrier cannot simply avail of the benefit /defense of limited liability. When the conditions printed in the back of the ticket stub are in letters so small that they are hard to read, this would not warrant the presumption that the passenger were aware of those conditions such that he had “fairly and freely agreed” to them . The passenger therefore is not bound by such stipulations. (SHEWARAN vs. PAL) II. SAFETY OF PASSENGERS DUTY: A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances. RULE: The responsibility of a common carrier for the safety of passengers as required in articles 1733 and 1755 cannot be dispensed with or lessened by stipulation, by the posting of notices, by statements on tickets, or otherwise. EXCEPTION: When a passenger is carried gratuitously, a stipulation limiting the common carrier's liability for negligence is valid, but not for willful acts or gross negligence. Page 153

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The common carrier is liable even if the ticket issued to passenger provides exemption of common carrier from death or injury of paseenger and notices were posted dispensing extraordinary diligence of the common carrier or even if the passenger was given a discount of his fares. (2001 Bar exams) If the passenger is carried gratuitously, stipulation limiting CC for negligence is valid but not for WILLFUL ACT OR GROSS NEGLIGENCE. A reduction of fare does not justify any limitation of the common carrier's liability.  Is the carrier liable for death of or injuries to the passengers due to the negligence or willful acts of ITS EMPLOYEES? YES, although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers.

fellow passenger, shot and killed the latter. The guard committed the killing while he was off-duty.) The Common carrier is held liable because 1. The driver , although stopping the bus, nevertheless did not put off the engine. 2. He started to run the bus even before the conductor gave him the signal to go and while the passenger was still unloading part of the baggage . ( LA MALLORCA vs. CA)

Illustrative rule: Two passengers engage in a fist-fight inside a bus terminal. An on-duty driver attempts to pacify them but instead kills one. The carrier is liable! But, if the killing of the passenger occurred while the driver is off-duty, the carrier is not liable. (Recall the case of Gillaco v. Manila Railroad, the carrier was held not liable when its employee, a security guard who harbored a grudge against a

Q: Is the carrier liable for death of or injuries to the passengers due to the willful acts or negligence of other passengers or of strangers?

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In the case of LACAM vs. SMITH , the Court held that an accident caused by defects in the automobile is not a caso fortuito. The rationale of the carrier’s liability is the fact that the passenger has neither the choice nor control over the carrier in the selection and use of the equipment and appliances in use by the carrier.

YES, a common carrier is responsible for injuries suffered by a passenger if the common carrier's employees through the exercise of the diligence of a good father of a family could have Page 154

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prevented or stopped the act or omission. The act of the passengers stabbing another passenger in the bus. To be absolved, the common carrier must prove that it was negligent in preventing the injuries from accident; otherwise, it would be held liable. (Bachelor Express vs. CA 188; SCRA 216) EE riding on train who stepped on watermelons. Held: The conduct of plaintiff in undertaking to alight while the train was yet slightly underway was not characterized by imprudence and that he was not guilty of contributory negligence. The circumstances show that it was no means so risky for him to get off while the train was yet moving. It is not negligence per se for a traveler to alight from a slowly moving train. (Cangco vs MRR 38 Phil 768) The DUTY of the PASSENGER is to observe the diligence of a good father of a family to avoid injury to himself. The contributory negligence of the passenger does not bar recovery of damages for his death or injuries, if the proximate cause thereof is the negligence of the common carrier, but the amount of damages shall be equitably reduced. Condition printed on the back of a passenger ticket commonly BAR OPERATIONS 2011

known as “CONTRACT OF ADHESION” , being drafted only by one party , usually the corporation , and the only participation of the other party (passenger ) is the signing of his signature “his adhesion thereto calls for greater strictness and vigilance on the part of the court of justice with the view of protecting the weaker party from abuses . Such contract if enforced will be subversive of public good , thus placing the common carrier at a decided advantage over those who may have legitimate claims against it. The said condition is therefore unenforceable, as contrary to public policy- to make the court accessible to all those who have need of their services. Moral damages are not recoverable on breach of contract of carriage in view of ART.2219-20 NCC . EXCEPTIONS1. Where the mishap results in the death of a passenger; Because the common carrier becomes subject to the rule in ART.2206 NCC entitles the spouse, descendants, ascendants to moral damages for mental anguish as a result of the death of the deceased. 2. 2.Where it is proved that carrier was guilty of fraud or bad faith EVEN if death does not result. Page 155

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Mere carelessness does not per se justify an inference of malice or bad faith on the part of the common carrier ; Must be GROSS negligence Concurring causes of action arising from negligent act of the common carrier: 1. Culpa Contractual/breach of contract (2003 Bar Exams) Only the carrier is primarily liable not the driver, because there is no privity between the driver and the passenger.(Art 1759, NCC.)  No defense of due diligence in the selection and supervision of the employees. 2. Culpa aquiliana (quasi delict) The carrier and the driver are solidarily liable as joint torfeasors.(Art 2180 NCC)  Defense of due diligence in the selection and supervision of employees is available. Exception: maritime tort resulting in collision  Although the relation of passenger and carrier is contractual both in origin and nature, nevertheless, the act that breaks the contract may also be a tort. (Air BAR OPERATIONS 2011

France vs. Carrascoso; 18 SCRA 155) In the case of injury to a passenger due to the negligence of the driver of the bus on which the passenger was riding on and of the driver of another vehicle, the drivers as well as the owners of the two vehicles are jointly and severally liable for damages. It should not make any difference that the liability of the bus owner springs from a contract while that of the driver springs from a quasi delict. (Tiu vs. Arriesgado) 3. Culpa criminal( Criminal Negligence) The driver is primarily liable. The carrier is subsidiarilly liable only if the driver is convicted and declared insolvent.(art 100 RPC) The principle of last clear chance would call for application in a suit between the owners and drivers of the two colliding vehicles. It does not arise where a passenger demands responsibility from the carrier to enforce its contractual obligations.(Phil. Rabbit Bus Lines vs. CA) CODE OF COMMERCE OVERLAND TRANSPORTATION Nature of Contract Page 156

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Art. 349. A contract of transportation by land or waterways of any kind shall be considered commercial: 1. When it involves merchandise or any object of commerce. 2. When, no matter what its object may be, the carrier is a merchant or is customarily [habitually] engaged in transportation for the public. Requisites for a contract of transportation by land or water to be commercial : (1) transportation of merchandise is always commercial (2) transportation of person or news is commercial only when the CC is a merchant or is habitually engaged in transportation for the public * principal requirement : the CC is a merchant or is habitually engaged in transportation for the public; the object carried is of little importance Effect of Civil Code on the provisions of the Code of Commerce on Overland Transportation – The NCC does not expressly repeal the provisions of the Code of Commerce on overland transportation. Instead, it makes such provisions suppletory to the provisions of the NCC on common carriers BAR OPERATIONS 2011

Bill of Lading: Written acknowledgement of receipt of goods and agreement to transport them to a specific place to a person named or to his order or bearer.  Ambiguity is construed against the carrier, the contract being one of adhesion. Kinds of Bills of Lading 1. Negotiable Bill of Lading – one in which it is stated that the goods referred to therein will be delivered to the bearer, or to the order of any person named in such document. 2. Non–Negotiable Bill of Lading – the goods referred to therein will be delivered to a specified person. 3. Clean Bill of Lading – One which does not indicate any defect in the goods 4. Foul Bill of Lading – Contains a notation indicating that the goods are in bad Condition. 5. Spent Bill of Lading – Covers goods that have already been delivered by the carrier without a surrender of a signed copy of the Lading. 6. Through Bill of Lading – Issued by a carrier who is obliged to use the facilities of other carriers. 7. On Board Bill of Lading – one in which it is stated that Page 157

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the goods have been received on board the vessel which is to carry the goods. 8. Received for Shipment Bill of Lading – it is stated that the goods have been received for shipment with or without specifying the vessel by which the goods are to be shipped. 9. Custody Bill of Lading – issued by the carrier to the whom the goods have been delivered for shipment but the vessel indicated in the bill of leading which is to carry the goods has not yet reached the port where the goods are held for shipment. 10. Port Bill of Lading – one which is issued by the carrier to whom the goods have been delivered, and the vessel to carry the goods is already in the port where the goods are held for shipment. Three–Fold Nature of Bills of Lading 1. A contract in itself and the parties are bound by its terms; 2. A receipt; and 3. A symbol of the covered by it  They are also documents of title, and if negotiable in form they can constitute negotiable documents of title. Legal effect of the Issuance of Bill of Lading BAR OPERATIONS 2011

Bill of Lading – Bill of leading constitute the legal evidence of the contract between the shipper and the carrier by the contents of which the disputes which may arise regarding their execution and performance shall be decided, no exception being admissible other than those of falsity and material error in the drafting.

Effect of absence of a bill of lading – It does not preclude liability on a contract of transportation. The dispute shall be determined by the legal proofs which the parties may present in support of their respective claims, according to the general provisions established in the Code for commercial contracts. Right to refuse packages Gen. Rule: – a common carrier cannot ordinarily refuse to carry a particular class of goods to the prejudice of the traffic in those goods. Exception: However, under Art. 365, carriers are authorized to refuse packages if they are unfit for transportation. Time for delivery of goods  Where no period fixed Page 158

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The carrier shall be bound to forward them in the first shipment of the same or similar goods, which he makes to the points where he must deliver them. Should he not do so, the damages caused by the delay shall be for his account.  Where for delivery of goods The carrier must deliver the goods within the time fixed. For failure to do so, the carriers shall pay the indemnity stipulated in the bill of lading. Also, damages shall be paid if the carrier refuses to pay the stipulated indemnity or is guilty of fraud in the fulfillment of his obligation. Limitation as to carrier’s liability (2002 Bar exams) (1). No Liability – The carrier will not be liable at all for the negligent acts of its crew and employees. This is NULL and VOID for being contrary to public policy (2). Limited Liability – Regardless of the value of the cargo, the maximum liability of the carrier will be, for example, P500. This is VOID for being contrary to public policy. (3). Qualified Liability – A stipulation in the bill of lading limiting the liability of the carrier to a BAR OPERATIONS 2011

valuation unless the shipper declares a higher value and pays a higher rate of freight is valid.  However, the carrier cannot limit its liability for injury to, or loss of, good shipped where such injury or loss was caused by its own negligence. Recovery of Damages from carriers for carriage of goods: (1) Inter-island – if goods arrived in damaged condition:  If damage is apparent, the shipper must file a claim immediately.  If damage is Not apparent he should file a claim within 24 hours from delivery.  The filing of claim is a condition precedent for recovery.  If the claim is filed, but the carrier refuses to pay: – Enforce carrier’s liability in court by filing a case:  Within 6 years, if no bill of lading has been issued, or  Within 10 years, if a bill of lading has been issued. Page 159

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(2) Overseas – Where goods arrived in a damaged condition from a foreign port to a Philippine Port of Entry:

(2) Under Art. 375, by creating a lien in favor of the carrier on the goods transported.

 Upon discharge of goods, if the damage is apparent claim should be filed immediately;  If damage is not apparent, claim should be filed within 3 days from delivery. When may a consignee of goods abandon the goods and recover the value thereof from the carrier?

AIR TRANSPORTATION The nature of an airline’s contract of carriage partakes of two types, namely: a contract to deliver a cargo or merchandise to its destination, and a contract to transport passengers to their destination.( British Airways vs. CA, 285 SCRA 450)

In any of the following cases: (1) Under Art. 363, in case of partial non-delivery, where the consignee proves that he cannot make use of the goods capable of delivery independently of those not delivered. (2) Under Art. 365, where the goods are rendered useless for sale and consumption for the purpose for which they are properly destined; or (3) Under Art. 371, where there is delay through the fault of the carrier. Two special sanctions for the enforcement by the carrier of the payment of expenses and transportation charges. (1) Under Art. 374, judicial sale of the goods transported; and

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Special rules on liabilities:  In case of flight diversion due to bad weather or other circumstances beyond the pilot’s control, the relation between the carrier and the passengers continues until the latter has been landed at the port of destination and has left the carrier’s premises. The carrier should necessarily exercise extraordinary diligence in safeguarding the comfort, convenience and safety of its stranded passengers until they have reached their final destination ( Phil Airlines vs. CA; Sept 15, 1993)  It is firmly settled that moral damages are recoverable in suits predicted on breach of a contract of carriage where it is proved that the carrier was guilty of fraud or bad faith- in attention to and lack Page 160

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of care for the interests of its passengers who are entitled to its utmost consideration, particularly as to their convenience- amount to bad faith which entitles the passenger to an award of moral damages(Japan Airlines vs. Simangon, April 22, 2009)  Even where overbooking of passengers is allowed as a commercial practice, the airline company would still be guilty of bad faith and still be liable for damages if it did not properly inform passenger that it could breach the contract of carriage even if they were confirmed passengers( Zalamea vs. CA GR 104235)  Neglect or malfeasance of the carrier’s employees could give ground for an action for damages. Passengers have a right to be treated by the carrier’s employees with kindness, respect, courtesy and due consideration and are entitled to be protected against personal misconduct, injurious language, indignities and abuses from such employees.  An air carrier is not liable for the loss of baggage in an BAR OPERATIONS 2011

amount in excess of the limit specified in the tariff which was filed with the proper authorities, such tariff being binding on the passenger regardless of the passenger’s lack of knowledge thereof or assent thereto. In a contract of air carriage, a declaration by the passenger of a higher value is needed to recover a greater amount.  An open dated ticket constitutes a complete contract between the carrier and passenger. Hence the airline company is liable if it refused to confirm a passenger’s flight reservation (Singson vs.CA, GR No. 119995)  An airline company which issued a confirmed ticket to a passenger covering successive trips on a trips on different airlines can be held liable for damages occasioned by bumping off by one of the successive airlines(Lufthansa German Airlines vs. CA; GR. No. 83612) MARITIME COMMERCE/ WATER TRANSPORTATION Special contract of maritime commerce: 1. Charter party 2. Bill of lading Page 161

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3. Loan of bottomry/respondentia 4. contract of transportations passengers 5. Marine insurance VESSELS (in general)extends to everything floating in and on the water, built in the form of vessel and used for navigation regardless of form, right or motive power. MERCHANT VESSELS- engaged in the transportation of passengers and freight from one port to another or from one place to another. *Are vessels real or personal property? PERSONAL- but they partake to a certain extent, of the nature and conditions of real property, on account of their value and importance of the world of commerce. CHARACTERISTICS OF MARITIME TRANSACTIONS: 1. Real- similar to transactions over real property with respect to effectivity against third persons, which are done through registration. The evidence of real nature is shown by:  the limitation of the liability of the agents to the actual value of the vessel and the freight money and BAR OPERATIONS 2011

 the right to retain cargo, embargo and detention of the vessel even in cases where ordinary civil law would not allow more than a personal action against debtor. 2. Hypothecary- the liability of the owner of the vessel is limited to the vessel itself. 3. Preference of credits- Mortgage of a vessel properly registered becomes of preferred mortgage lien which shall have priority over all claims against the vessel in an extrajudicial foreclosure for: a. credit in favor of the public treasury; b. judicial cost of the proceedings; c. pilotage and tonnage charges and other sea and port changes; d. salaries of depositories and keepers of the vessel; e. captain and crew's wages; f. general average g. salvage including contract salvage; h. maritime liens arising prior in time to the recording of the preferred mortgage; i. damages arising out of tort; and j. Preferred mortgage registered prior in time. A.BILL OF LADING ( 1998 and 2005 bar Exams) Page 162

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A bill of lading serves two functions: a. It is a receipt for the goods shipped; b. It is a contract by which three parties, namely the shipper, the carrier, and the consignee undertake specific responsibilities and assume stipulated obligations. A bill of lading delivered and accepted constitutes the contract of carriage even though not signed, because the acceptance of a paper containing the terms of a proposed contact generally constitutes an acceptance of the contract and of all of its terms and conditions of which the acceptor has actual or constructive notice (Keng Hua Paper Products Inc. vs. CA, Feb. 1998) A bill of lading is in the nature of a contract of adhesion. DOCTRINE OF LIMITED LIABILITY (HYPOTHECARY NATURE OF MARITIME COMMERCE) ART. 587, CODE OF COMMERCE 1994, 1997,1999 and 2000 bar exams  The liability of the ship owner is limited to the value of the vessel. The limited liability of the owner is confined to the vessel, equipment and freight or BAR OPERATIONS 2011

insurance, if any. If the ship owner has abandoned the ship, equipment and freight, his liability is extinguished.  If the vessel sinks the liability of the owner is extinguished, although he may have other properties.  If the vessel does not sink, the owner May exercise the right of abandonment and the liability of the ship owner is limited to the value of the vessel. EXCEPTIONS TO LIMITED LIABILITY RULE: 1. When the vessel is not abandoned by the owner or ship agent 2. When the vessel is covered by insurance 3. Expenses for repair of the vessel before it sails 4. Claims of employees under the labor laws 5. When ship owner/ship captain is at fault or guilty of negligence. a. lack of proper and adequate equipment(insufficient life vests) b. lack of proper technical training of the offices and of the vessel Monarch Ins Co. vs. Ca; Allied Guarantee Insurance Co vs. CA & Page 163

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Equitable Insurance (June 8, 2000)

vs.

CA,

As a general rule, a ship owner's liability is merely coextensive with his interest in the vessel, except where actual fault is attributable to the ship owner. Thus, as an exception to the limited liability doctrine, a ship owner or ship agent may be held liable for damages when the sinking of the vessel is attributable to the actual fault or negligence of the ship owner or its failure to ensure the seaworthiness of the vessel. The instant petitions cannot be spared from the application of the exception to the doctrine of limited liability in view of the unanimous findings of the courts below that both Aboitiz and the crew failed to ensure the seaworthiness of the M/V P. Aboitiz.( Aboitiz Shipping Corp vs CA, October 17,2008) PHILIPPINE COAST GUARD (PCG) vested with exclusive authority over the registration and documentation of Philippine vessels, issuance of all certificates, licenses or documents, necessary or incident to registration. VESSELS REQUIRED TO BE REGISTERED: 1. All vessels used in Philippine water;

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2. Vessels of 3 tons gross shall not be registered UNLESS the owner shall so desire; 3. All undocumented vessels. Where Registration to be effected? - At its home port (when a coast guard district or station is on the same port); if none, at the nearest COAST GUARD DISTRICT OR STATION). OPTIONS AS TO SMALL BOATS: 1.) If vessel is of domestic ownership and 15 tons gross or less certificate of Philippine registry is optional. Purpose: declare nationality of a vessel 2.) Vessel (5 tons gross or less) & no certificate of Philippine registry  certificate of ownership is optional. Privileges: right to engage in Philippine coastwise trade and protection of the authorities and the flag is also subject to the same privileges. 3.) Vessel (3 tons gross or less)  not to be registered unless the owner shall so desire. PURPOSE OF REGISTRATION: Purchaser's rights maybe maintained against a claim filed by the THIRD PERSON. *Who shall be entitled to the freightage and who shall be obliged to pay the crew and Page 164

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other persons who make up the compliment of the vessel? >It depends upon the time of the sale. If made while it is on a voyage, freightage shall pertain entirely to PURCHASER and payment of the crew and other persons who make up its compliment for same voyage shall be for his account. If made after the vessel has arrived at the port of its destination, freightage shall pertain to the VENDOR and other individuals who make up its complement shall be for his account, UNLESS the contrary is stipulated in either case. FORMALITIES FOR VOLUNTARY SALE ABROAD: 1. Execution of the bill of sale before consul of the Philippines at the port where it terminates its voyage; 2. Inscription in the registry of the consulate; 3. Forwarding by the consul of a true copy of the instrument of purchase and sale to the registry of vessel; 4. Statement whether the vendor receives its price in whole or in part. FORMALITIES FOR SALE WHEN VESSEL RENDERED USELESS: 1. application for examination; 2. notification of the consignee/ insurer; BAR OPERATIONS 2011

3. proof of damage and impossibility of the repair of the vessel; 4. order for the sale of vessel at public auction. RULES FOR THE SALE OF VESSEL AT PUBLIC AUCTION: 1. articles of the vessel shall be appraised after making an inventory 2. posting of the order of the auction 3. announcement 4. auction shall be held on the day fixed 5. Observance of special provisions, governing the sale of the vessel while it is on the foreign country. 2 METHODS OF SALE: 1. judicial 2. voluntary *EFFECT OF REGISTRATION OF VOLUNTARY SALE - if it take place while the vessel is on a voyage, the preferred & hypothecary nature of the credit subsists against the vessel until after its return to the port of registry and 3 months after the inscription of the sale in the registry of vessels or after the return, so as to prevent the possibility of fraud upon creditors through voluntary sale. PARTICIPANTS IN MARITIME COMMERCE: Page 165

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a. ship owners and ship agents b. captains and masters of the vessel c. officers and crew of the vessel c.1 sailing (1st mate) c.2 quartermaster (2nd mate) c.3 engineer d. seamen e. supercargoes A. SHIP OWNERS AND SHIP AGENTS Ship owner - A person who has possession or control in the management of the vessel and the consequent right to direct her navigation and receive freight earned and paid, while his possession continues. Ship agent – A person entrusted with provisioning and representing the vessel in the port in which it may be found; also includes the ship owner LIABILITY OF SHIP OWNER AND SHIP AGENT: 1. for the acts of the captain 2. 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 3. Indemnities in favor of third person that may arise from the conduct of the captain in the care of goods and safety of passengers transported. 4. Tort or quasi-delict committed by captain EXCEPT collision with another vessel. BAR OPERATIONS 2011

5. Damages in case of collision due to the fault, negligence or want of skill of captain, sailing mate or by other member of the complement. SHIP AGENT'S AND OWNER’S LIABILITY LIMITED: - By abandoning the vessel with all her equipment and the freight it may have earned during the voyage(by NECESSARY IMPLICATION); limited to the value of the vessel or its insurance in view of the so-called REAL AND HYPOTHECARY nature of maritime law. - Effect: cessation of the responsibility of the owner POWER AND FUNCTIONS AND LIABILITIES OF SHIP AGENT: 1. capacity to trade; 2. discharge duties of the captain in case of the latter's absence; 3. contract in the name of the owners with respect to repairs, details of equipment, armament, and all that relate to the requirements of navigation; 4. order of new voyage and make a new charter or insure the vessel after obtaining authorization from the ship owners. DUTY OF SHIP AGENT TO DISCHARGE THE CAPTAIN AND MEMBERS OF THE CREW: - If the seamen contract is not for a definite period or voyage, he Page 166

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may discharge them at his discretion - If for a definite period, he may not discharge them until after the fulfillment of their contracts EXCEPT on the ff. grounds: a. insubordination in serious matters b. robbery c. theft d. habitual drunkenness e. damage caused to the vessel or to its cargo through malice, manifest or proven negligence EFFECT/LOSS/DESTRUCTION OF VESSEL: 1. extinguishes liability arising from the conduct of the captain in the vigilance of the goods and for the safety of the passengers and for any liability arising from negligent acts of the captain 2. extinguishes liability for the wages of the captain and the crew and for advances made by the ship agent if the vessel is lost by shipwreck or capture 3. liability for collision B. CAPTAINS AND MASTERS OF THE VESSEL Captain- who govern vessels that navigate the high seas or ships of large dimensions and importance, although engaged in the coastwise trade Masters- who command smaller ships engaged exclusively in the coastwise trade BAR OPERATIONS 2011

NATURE OF POSITION: 1. General agent of the ship owner 2. Technical Director of the vessel 3. Representative of the Government of the country under whose flag he navigates QUALIFICATIONS: 1. Filipino citizen 2. Legal capacity to contract 3. Must have passed the required physical, mental examination required for licensing him as such INHERENT POWERS OF THE CAPTAIN: 1. appoint crew in the absence of ship agent 2. command and direct crew 3. impose correctional punishment on those who while on board vessel fail to comply with his orders or are wanting in discipline 4. make contracts for the charter of vessel in the absence of ship agent 5. supply, equip, and provision the vessel 6. order repair of vessel to enable it to continue its voyage SOURCES OF FUNDS TO COMPLY WITH THE INHERENT POWERS OF THE CAPTAIN: 1. from the consignee of the vessel 2. from the consignee of the cargo 3. by drawing on the ship agent Page 167

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4. by a loan on bottomry 5. by sale of part of the cargo DUTIES OF THE CAPTAIN: 1. bring on board the proper certificate and document and a copy of the Code of Commerce 2. keep a logbook, accounting book and freight book 3. examine before the voyage 4. stay on board during the loading and unloading of the cargo 5. be on deck while leaving or entering the port 6. seeks protest, arrival under stress and in case of shipwreck 7. follow instruction of and render accounting to the ship agent 8. save the vessel lost in case of wreck 9. hold in custody properties left by deceased by passengers and crew members 10. comply with the requirements of customs, health, etc. at the port of arrival LIABILITIES OF THE SHIP AGENT/SHIP OWNER FOR ACTS DONE BY THE CAPTAIN TOWARDS PASSENGERS AND CARGOES MAKING THEM SOLIDARILY LIABLE TO THE LATTER: 1. damages to vessel and to cargo due to lack of skill and negligence 2. theft and robbery of the crew 3. losses and fines in violation of laws BAR OPERATIONS 2011

4. damages due to mutinies 5. damages due to misuse of power 6. deviations 7. arrival under stress 8. damages due to nonobservance of marine regulations NO LIABILTY FOR THE FOLLOWING: 1. damages caused to the vessel by force majeure 2. obligations contracted for the repair, equipment and provisioning of the vessel UNLESS he has expressly bound himself personally or has signed a bill of exchange or promissory note in his name CARGO- which includes all goods, wares and merchandise aboard a ship which do not from part of the ship's stores. REQUIREMENTS FOR DEFENSE OF PUBLIC ENEMY: 1. act of public enemy in war was the proximate and only cause of the loss 2. common carrier exercise due diligence to prevent, minimize loss before, during, and after occurrence of the act of the public enemy in war FORMALITIES REQUIRED WHERE VESSEL HAS GONE THROUGH HURRICANE

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1. Captain must make a protest before competent authority at the first port he touches 2. Such a protest must be made within 24 hours following his arrival 3. captain must ratify it within some period when he arrives at his destination 4. he must immediately proceed with the proof of the facts FORMALITIES REQUIRED WHERE VESSEL SHIPWRECKED: 1. captain must make a protest before the nearest competent authority 2. protest be made within 24 hours following his arrival 3. make sworn statement of the facts 4. authority/consul abroad shall verify said facts 5. such authority shall take other steps in carrying at the facts 6. such authority shall also make statements of what may be the result of the proceeding in the logbook and in that of the sailing mate 7. he shall deliver the original records to the captain 8. captain must ratify the protest C. OFFICERS AND CREW 1. Sailing mate/First mate - second chief of the vessel who takes the place of the captain in case of absence, sickness, or death and shall assume all of BAR OPERATIONS 2011

his duties, powers, responsibilities

and

DUTIES: 1. provide himself with maps, and charts with astronomical tables necessary for the discharge of his duties 2. keep the Binnacle book 3. Change the course of the voyage on consultation with captain and the officers of the boat, following the decision of the captain in case of disagreements. 4. Responsible for all the damages caused to the vessel or to the cargo by reason of his negligence 2. Second mate - takes command of the vessel in case of the inability or disqualification of the captain and the sailing mate, assuming in such case their powers and responsibilities and duties DUTIES: 1. preserve the hull and rigging of the vessel 2. arrange well the cargo 3. discipline the crew 4. assign work to crew members 5. Inventory the rigging and equipment of the vessel, if laid up. 3. Engineers Page 169

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- Officers of the vessel but have no authority EXCEPT in matters to motor apparatus. When 2 or more are hired, one of them should be the Chief Engineer DUTIES: 1. in charge of motor apparatus, spare parts, and other instruments pertaining to the engines 2. keep the engines and boilers in good condition 3. not to change or repair the engine without authority of the captain 4. inform the captain of any damage to the motor apparatus 5. keep an Engine book 6. supervise all personnel maintaining the engine 4. Members of the Crew Hired by the ship agent. Where he is present and in his absence, the captain hires them preferring Filipinos, and in their absence, he ,ay take in foreigners but not exceeding 1/5 of the crew. CLASSES OF SEAMAN'S CONTRACT: 1. by the voyage 2. by the month 3. by share of profits or freightage JUST CAUSES FOR THE DISCHARGE OF SEAMAN WHILE CONTRACT SUBSISTS: 1. perpetration of a crime BAR OPERATIONS 2011

2. repeated insubordination, want of discipline 3. repeated incapacity and negligence 4. habitual drunkenness 5. physical incapacity 6. desertion CAUSES OF REVOCATION OF VOYAGE: 1. war 2. blockade 3. prohibition to receive cargo at destination 4. embargo 5. inability of the vessel to navigate RULES IN CASE OF DEATH OF A SEAMAN: The seaman's heirs are entitled to the payment as follows: 1. if death is natural: a. compensation up to time of death if engaged on voyage b. if by voyage- half of amount if death occurs on voyage out; and full if on voyage in c. if by shares- none if before departure; full if after departure 2. if death is due to defense of vessel- full payment 3. if captured in defense of vesselfull payment 4. if captured due to carelessnesswages up to the date of the capture Page 170

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NO LIABILY UNDER THE FOLLOWING CIRCUMSTANCES:

to bring about an entire cessation for the time being of all trade

1. If before beginning voyage, captain attempts to change it or a naval war with the power to which was destined occurs 2. If a disease breaks out and be officially declared an epidemic in the port of destination 3. If the vessel change owner or captain

Embargo - a proclamation or order of the State usually issued in time of war/ threatened hostilities prohibiting the departure ships/ goods from some or all the ports of such State until further order

COMPLEMENT OF THE VESSEL - All persons on board, from the captain to the cabin boy, necessary for the management, maneuvers, and service, thus including the crew, the sailing mates, engineers, stalkers and other employees on board not having specific designations - It does not include the passengers or the person whom the vessel is transported FORMALITIES REQUIRED FOR SEAMAN'S AGREEMENT: 1. reduced to writing in Accounting Book 2. signed by parties 3. visaed by marine authority if executed in Philippine territory/consul or consular agents if executed abroad 4. read to the seaman concerned and such fact must be stated in the agreement Interdiction of Commerce a governmental prohibition of commercial intercourse intended BAR OPERATIONS 2011

Blockade - a sort of circumvallation of place by all foreign connections and correspondence is as far as human power can affect it to be cut-off SUPERCARGOES - person who discharge administrative duties assigned to him by ship agent or shippers, keeping an account and record of transaction as required in the accounting book of the captain B.CHARTER PARTY - Contract by virtue of which the owner or agent binds himself to transport merchandise or persons of a fixed price. It may either be contract of affreightment (time and Voyage Charter) and bareboat or demise charter. CLASSES OF CHARTER PARTY 1. As to extent of vessel hired a. total- whole of the vessel is chartered Page 171

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b. partial- only part of the vessel is chartered 2. As to time a. until a fixed day/ for a determined number of days and months b. for a voyage(outgoing/return/ro undtrip) 3. As to freightage a. for a fixed amount for the whole cargo b. for a fixed amount per ton c. for an amount per month a. Contract of Affreightmentthe owner of the vessel leases a part or all of the space of the vessel to carry goods but retains the possession, command and navigation of the vessel. The charter merely has the use of the space in the vessel in return for the payment of the charter hire. b. Bareboat/ Demise Charter— involve the transfer of full possession and control of the vessel to the charterer. The entire control and management of the vessel is given up to the charterer. The charterer mans the vessel with his own people. (2003 Bar exams)

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The owner of the vessel has no more insurable interest on the vessel. In case of loss of the vessel, the ship owner can recover the value of the vessel from the charterer.(Caltex vs. Sulpicio line, 1999) FORMAILITIES REQUIRED FOR A CHARTER PARTY: 1. in writing 2. drawn in duplicate 3. signed by the parties 4. contain stipulation  not all requisites are essential for the validity of charter party Primage - belongs to owner/ freighters; - increase of the freight rate - considered gratuity to master if is stipulated - a bonus to be paid to a captain after a successful voyage Demurrage - Sum which is fixed by the contract of carriage, or which is allowed, as remuneration to the owner of a ship for the detention of his vessel beyond the number of days allowed by the charter party for loading/unloading/sailing. "Lay days" -days allowed to charter parties for loading and unlading - period when vessel will be delayed in port for loading and unloading. "Extra Lay Days" - days which followed after lay days have elapsed Page 172

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Deadfreight – A cargo not loaded is considered as deadfreight, which covers the amount paid by or recoverable from the charterer for the portion of the ship’s capacity the latter contracted for but failed to occupy. GOODS TRANSFERRED MAY BE: 1. sold by captain to necessary repairs 2. jettisoned for the common safety 3. loss by reason of shipwreck/stranding 4. seized by pirates/enemies 5. suffer deterioration/diminutions 6. increase by natural cause and weight or size RIGHTS AND OBLIGATIONS OF CHARTER PARTY: A. Of the ship owner or ship agent 1. If the vessel is chartered wholly not to accept cargo from others; 2. To observe represented capacity; 3. To unload cargo clandestinely placed; 4. To substitute another vessel if load is less than 3/5 of capacity; 5. To leave the port if the charter does not bring the cargo within the lay days and extra lay days allowed; 6. To place in a vessel in a good condition to navigate; BAR OPERATIONS 2011

7. To bring cargo to nearest neutral port in case of war or blockade. B. Of the charterer 1. to pay the agreed charter price 2. to pay freightage or unboarded cargoes 3. to pay losses to others for loading uncontracted cargo and illicit cargo 4. to wait if the vessel needs repair 5. to pay expenses for deviation RESCISSION OF CHARTER PARTY A. At charterer's request 1. by abandoning the charter and paying half of the freightage 2. error in tonnage or flag 3. failure to place the vessel at the charterer's disposal 4. return of the vessel due to pirates, enemies or bad weather 5. arrival at the port for repairs B. At ship owner’s request 1. If the extra lay days terminate without cargo being placed alongside the vessel 2. Sale by the owner of the vessel before loading C. Fortuitous causes 1. war 2. blockade 3. prohibition to receive cargo 4. embargo

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5. inability of the vessel to navigate D. LOANS ON BOTTOMRY/ RESPONDENTIA (1961,1967,& 1980 bar exams) These loans are secured by the owner or captain of the vessel for the use of the vessel. In the case of loans on bottomry, the security of the loan is the vessel itself; while loan on respondentia, the security of the loan is the cargo. The loan is in the nature of insurance. The loan will only be paid on the safe arrival of the vessel or cargo fails to reach the port of destination, the creditor loses his right to recover the amount of the loan. COMMON ELEMENTS OF LOANS ON BOTTOMRY AND RESPONDENTIA 1. exposure of security or marine peril 2. obligation of the debtor conditioned only upon safe arrival of security at the point of destination HYPOTHECARY NATURE OF BOTTOMRY AND RESPONDENTIA: General Rule: the obligation of the borrower to pay is extinguished if the goods given as security are absolutely lost by reason of an accident of the voyage designated, and if it is proven that the goods were on board. BAR OPERATIONS 2011

EXCEPTIONS: 1. loss due to inherent defect 2. loss due to the barratry on the part of the captain 3. loss due to the fault or malice of the borrower 4. that the vessel is engaged in contraband 5. that the cargo loaded on the vessel be different from that agreed upon Bottomry/reponden Simple tia loan Marine risk Duly established Not existence of a marine risk neces is necessary sary Form and manner Must be executed in Formal accordance with the requisi form and manner tes of prescribed by the code an of commerce ordina ry contra ct will suffice Registry of Vessels Must be recorded in No such the registry of Vessel registratio to be binding to third n is persons required Preference Preference is Preferenc extended to the last e is lender extended to the first lender

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When loan on bottomry or respondentia regarded as Simple Loan 1. Lender loaned an amount larger than the value of the object due to fraudulent means employed by the borrower(art 726 code of commerce) 2. Full amount of the loan is not used for the cargo or given on the goods if all of them could not have been loaded, the balance will be considered a simple loan( art 727 Code of Commerce) 3. If the effects on which the money is taken is not subjected to any risk(729 Code of commerce Note: under existing laws, the parties to a loan, whether ordinary or maritime, may agree on any rate of interest (Cb circular 905); provided the same is not contrary to law, morals, good customs, public order or public policy. Art 1306 NCC ACCIDENTS IN MARITIME COMMERCE (2000 bar exams) 1 Averages 2. Arrival Under stress 3. Collision 4. Shipwreck Average An extraordinary or accidental expense incurred during the voyage in order to preserve the cargo, vessel or both, and all damages or deterioration suffered by the vessel from departure to the port of loading to the BAR OPERATIONS 2011

consignment (art 806 Code of commerce) The person whose property has been saved must contribute to reimburse the damage caused or expense incurred if the situation constitutes general average. It is classified into: (1) general or gross average or (2) simple or particular. Particular/ Gross/ general simple Definition Damages or Damages or expenses expenses caused to the deliberately vessel or cargo caused in order that did not to save the inure to the vessel, its cargo common orboth from real benefit, and and known borne by risk.(811) respective owner.( art 809) Liability The owner of All persons the goods having an which gave rise interest in the to the expense vessel and the or suffered the cargo therein at damage shall the time of the bear this average shall average.(810) contribute to satisfy this average(812) The insurers and lenders on bottomry and respondentia shall likewise Page 175

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contribute Numbers of interests involved Only one Several interests interest is involved involved Share in the damage/expense 100% share In proportion to the value of the owner’s property saved Right to recover No There may be reimbursement reimbursement Requisites of Gross or General average 1. Common danger  that both the ship and the cargo, after has been loaded, are subject to the voyage, or in the port of loading or unloading  that the danger arises from the accidents of the sea, dispositions of the authority or faults of men, provided that the circumstances producing the peril should be ascertained and imminent or may rationally be said to be certain and imminent. 2.Deliberate Sacrifice Gen. rule: sacrifice is made through the jettison of the cargo or part of the shipis thrown overboard DURING THE VOYAGE. Exceptions: a. where the sinking of a vessel is necessary to extinguish a BAR OPERATIONS 2011

fire in a port, roadsteads, creek or bay b. where cargo is transferred to lighten the ship on account of a storm to facilitate entry into a port. 3.Sucess Pupose: To be able to demand general contribution 4.Proper formalities and legal steps a. procedure for recovery b. assembly and deliberation c. resolution of the caption d. entry of the resolution in the logbook e. detailed minutes f. delivery of the minutes to the maritime judicial authority of the first port, within 24hours from arrival  Ratification by the captain under oath. Goods Not Covered By General Average Even if sacrified: Goods carried on deck 1.goods not recorded in the books or records of vessel 2.fuel for the vessel if there is more than sufficient fuel for the voyage. JETTISON Act of throwing cargo overboard in order to lighten the vessel ORDER OF GOODS TO BE CAST OVERBOARD IN CASE OF JETTISON: Page 176

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1. Those which are on the deck, preferring the heaviest one with the least utility of value 2. Those which are below the upper deck beginning with the one with greatest weight and smallest value jettisoned goods are not res nullius nor deemed abandoned within the meaning of civil law so as to be the object of occupation by salvage. When boarded on the deck-- not a gen average (internation carriage); not on domestic carriage

Arrival Under stress Art 819 - arrival of a vessel at a port of destination on account of lack of provision, well-founded fear of seizure, pirates, or accidents in sea disabling navigation When When Who lawful unlawful bears expense s The 1. lack of The ship inability provisions owner or to due to ship continue negligence agent is voyage is to carry liable in due to according case of lack of to usage unlawful provisions and arrival , well customs; under founded 2.risk of stress. fear of enemies But they seizure, not well- shall not privateers known or be liable , pirates manifest; for or 3.defect damages accidents due to caused of the sea improper by a disabling repair; reason of it to 4.malice, a lawful navigate negligence arrival. BAR OPERATIONS 2011

, lack of foresight, lack of skill Cases of collision: 1. Due to the fault, negligence or lack of skill of the captain, sailing mate or the complement of the vessel--under 826, the ship owner shall be liable for the losses and damages 2. Due to the fault of both vessels -> under 827, each vessel shall suffer its own losses, but as regards the owners of the cargoes, both vessels shall be jointly and severally liable 3. Where it cannot be determined which of the 2 vessels is at fault --> under 828, each vessel shall suffer its own losses, and both shall also be solidarily responsible for the losses and damages caused to their cargoes 4. Collision due to fortuitous event or force majeure --> under 830, each vessel shall bear its own damages 5. Where two vessels collide with each other without their fault but by reason of the fault of a third vessel --> under 831, the owner of the third vessel causing the collision shall be liable for the losses and damages 6. a vessel which is properly anchored and moored may collide with those nearby by reason of a storm or other cause of force majeure --> under 832, the vessel run into shall suffer its own damages and expenses Page 177

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Nautical Rules to determine negligence : 1. When 2 vessels are about to enter a port, the farther one must allow the nearer to enter first; if they collide, the fault is presumed to be imputable to the one who arrived later, unless it can be proved that there was no fault on its part. 2. When 2 vessels meet, the smaller should give the right of way to the larger one. 3. A vessel leaving port should leave the way clear for another which may be entering the same port. 4. The vessel which leaves later is presumed to have collided against one who has left earlier. 5. There is also a presumption against the vessel which sets sail at night. 6. The presumption also works against the vessel with spread sails which collide with another which is at anchor, and cannot move, even when the crew of the latter has received word to lift anchor, when there was not sufficient time to do so or there was fear of a greater damage or other legitimate reason. 7. The vessel which is not properly moored or does not observe the proper distances has the presumption against itself. 8. The vessel which is moored at a place not used for the purpose, or which is improperly moored or does not have suffiBAR OPERATIONS 2011

cient cables, or which has been left without watch, has also against itself the presumption. 9. The same rule applies to those vessels which do not have buoys to indicate the location of its anchors to prevent damage to these vessels which may approach it. Zones in time of collisions (3 time zones): 1. all the time up to the moment when the risk of collision may have said to have begun --> within this zone, no rule is applicable because none is necessary. Each vessel is free to direct its course as it deems best with reference to the movements of the other vessel. 2. the time between the moment when the risk of collision begins and the moment when it has become a practical necessity. 3. the time between the moment when collision has become a practical certainty and the moment of actual contact Effect of fault of privileged vessel during third zone : If a vessel having a right of way suddenly changes its course during the third zone, in an effort to avoid an imminent collision due to the fault of another vessel, such act may be said to be done in Page 178

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extremis, and even if wrong, cannot create responsibility on the part of said vessel with the right of way. Thus, it has been held that fault on the part of the sailing vessel at the moment preceding a collision, that is, during the third division of time, does not absolve the steamship which has suffered herself and a sailing vessel to get into such dangerous proximity as to cause inevitable harm and confusion, and a collision results as a consequence. The steamer having a far greater fault in allowing such proximity to be brought about is chargeable with all the damages resulting from the collision; and the act of the sailing vessel having been done in extremis and even wrong, is not responsible for the result.

CASES COVERED BY COLLISION AND ALLISION: 1. one vessel at fault- such vessel is liable for damage caused to innocent vessel as well as damages suffered by owners of cargo of both vessels 2. both vessels at fault- each vessel must bear its own loss but the shippers of both vessel may go against the ship owner who will be solidarily liable 3. vessel at fault not known- same as rule 2 4. third vessel at fault- same rule 1 BAR OPERATIONS 2011

5. fortuitous event- no liability, each bear its own loss Rules governing LIABILITIES of parties in case of COLLISION: (1995, 1997,1998, & 2007 Bar exams) 1. Where collision is due to the negligence or malice of the captain and/or other ship officers of one vessel, the ship owner of such vessel shall be liable for all resulting damages. 2. Where collision is due to the fault of both vessels, each vessel shall suffer their respective losses but as regards to the owners of the cargoes, both vessels shall be jointly and severally liable. 3. If it cannot be determined which vessel is at fault, each vessel shall suffer its own loses and both shall be solidarily liable for loses or damages on the cargo. (DOCTRINE OF INSCRUTABLE FAULT) 4. The vessels may collide with each other through fortuitous event or force majeure. In which case, each shall bear its own damage. 5. Two vessels may collide without their fault but by reason of a third vessel. The third vessel shall be liable for losses and damages sustained. Requisite for RECOVERY arising from collision: 1. Protest must be made within 24 hours before: a) Competent authority at the point of collision or Page 179

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b) At the first port of arrival, if in the Philippines and to the Philippine Consul, if the collision took place abroad. Injuries to persons and damage to cargo of owners not on board on time of collision need not be protested. Article 835, Code of Commerce: In case of collision, there must be a marine protest to recover collision damage; in such a case, the marine protest is a condition sine qua non and not merely a disclaimer unlike in the case of arrival under stress and shipwreck. CARRIAGE OF GOODS BY SEA ACT Applicable to all transportation of goods by sea in foreign trade to and from Philippine ports AND does not apply to purely domestic transport. Laws applicable to a contract for the carriage of goods by sea: 1. Distinguish - common carrier (Civil Code) - private carrier 2. Where is the vessel going? a. Common carrier coming to the Phils. 1st: Civil Code 2nd: COGSA (it's more specific than Code of Commerce) - in foreign trade BAR OPERATIONS 2011

3rd: Code of Commerce b. Private carrier coming to the Phils. in foreign trade 1st: COGSA (because it's more specific) 2nd: Code of Commerce 3rd: Civil Code (provisions not on common carriers e.g. torts, contracts) c. From the Phils. to a foreign country: apply laws of such foreign country (Art. 1753) - with respect to vessels destined for foreign ports, the COGSA doesn't apply unless parties make it applicable. Q: In what situations does COGSA primarily apply? A: Where the parties expressly stipulate that COGSA shall govern their respective rights and obligations. Q: Can the COGSA apply in domestic shipping? A: Generally, NO. EXCEPTION: when parties agree to make it apply. Q: What application does COGSA have in carriage of passengers? A: None. Applies only to carriage of goods. What is the “TACKLE TO TACKLE” RULE? The shipper shall be responsible for the goods the moment it Page 180

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passes through one side of the ship for the purpose of loading until it passes through the other side for discharging. The reason for this being that there are two tackles involved in this operation; one for loading, the other, unloading. The shipper is responsible for: Loading, Handling, Transport, Carriage, Custody, and Discharge What is the Rule for LOSS or DAMAGE to the goods? (1992, 1995, 20000 & 2005 bar exams) If the damage is apparent, then notice must be immediately given. The notice may either be in writing or orally. If the damage is not apparent, notice must be given within three days from such delivery. Failure to give notice is not a bar to the action to file provided the filing of the suit is made within one year from delivery to consignee. Notice requirements:  COGSA: Sec. 3(6) If loss or damage is apparent protest as soon as receipt of goods If not apparent -> within 3 days of delivery Rationale behind the 3-day notice and relatively short prescriptive period: BAR OPERATIONS 2011

To provide carrier an opportunity to look for the lost goods - To discover who was at fault -In case of transshipment, to determine, when and where damage occurred.  Code of Commerce: Art. 366 apparent - protest at time of receipt non-apparent - within 24 hours after receipt  WARSAW: Art. 26 in case of damage of: baggage - within 3 days from receipt goods - within 7 days in case of delay: within 14 days from receipt Prescriptive period  the carrier and the agent shall be discharged form liability in respect of loss or damage unless suit is brought within 1 year from: (1) in case of damaged goods: from the time delivery of the goods was made (2) in case of non-delivery (i.e., lost goods): from the date the goods should have been delivered Loss or damage as applied to the COGSA contemplates a situation where no delivery at all times was made by the shipper of the goods because the same had perished, gone out of commerce, or Page 181

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disappeared in such a way that their existence is unknown or they cannot be recovered. It does not include a situation where there was indeed a delivery but to the wrong person or a misdelivery (Ang vs. American Steamship Agencies 19 scra123) and damage arising from delay or late delivery( Mitsui O.S.K line Ltd vs. CA 287 SCRA 366) in such instance the civil code rules on prescription shall apply.  Hence, in case of misdelivery (delivery to wrong person) or conversion of the goods, the rules on prescription found in the Civil Code shall apply (10 years for contracts; 4 years for tortuous obligations) The one year period is suspended by: a. The express agreement of the parties (Universal Shipping Lines Inc vs. IAC 1990) b. The filing of an action in court until it is dismissed  the 1yr period shall run from delivery of the last package and is not suspended by extrajudicial demand.  the one year period shall run from delivery to the arrasstre operator and not to the consignee SALVAGE LAW (ACT 2616)

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I. FOUR REQUISITES FOR SALVAGE REWARD TO BE WARRANTED: A. There must be a valid object of salvage, i.e., vessel, cargo, freight or wreck of vessel or cargo; B. Such object must have been exposed to marine peril; C. Salvage services must be rendered voluntarily, i.e., not arising from preexisting duty; D. Salvage effort must be successful. II. SHIPWRECK AND DERELICT: A. Shipwreck. A shipwreck refers to the injuries suffered by the vessel disabling the latter for navigation. B. Derelict. It refers to the vessel or cargo abandoned at sea by those entrusted by such vessel or cargo. A derelict is a vessel or cargo badly damaged and abandoned by the crew to the mercy of the sea. Mere abandonment of such vessel or cargo does not make it res nullius so that anybody can claim it. The proper procedure must be followed. III. PROCEDURE: A. If the vessel is abandoned, salvor must tow it to the Page 182

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nearest port where it will be delivered to the Municipal Treasurer or to the Collector of Customs who will advertise the fact of salvage; B. If owner of salvaged vessel appears, he may take possession of the vessel and must pay a reward, the amount of which is not more than 50% of the value of the vessel; C. If no claim for the vessel is made within 3 months after the publication of the advertisement, the Municipal Treasurer will sell the property saved at a public auction and the reward and expenses shall be deducted from the proceeds. The balance is deposited with the Treasury; D. If no one claims the same after 3 years, ½ shall go to the salvors and the other half to the government. IV. CONSIDERATIONS IN DETERMINING THE AMOUNT OF REWARD 1.) First case A. Value of the property saved; B. Zeal employed by those who made the salvage; C. Danger to the lives of those who participated; BAR OPERATIONS 2011

D. Number of persons who took part; E. Services rendered; F. Expenses incurred 2.) Second case: If one vessel saves another vessel, the reward going to the former shall be divided as follows: A. ½ to the ship owner; B. ¼ to the captain; and C. ¼ to the crew. WARSAW CONVENTION Convention for the Unification of Certain Rules Relating to International Transportation by Air The Warsaw Convention:  mandates carriers to issue passenger tickets;  requires carriers to issue baggage checks for checked luggage;  creates a limitation period of 2 years within which a claim must be brought (Article 29); and  limits a carrier's liability to at most:  250,000 Francs or 16,600 Special Drawing Rights (SDR) for personal injury;  17 SDR per kilogram for checked luggage and cargo, or $20USD Page 183

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

per kilogram for nonsignatories of the amended Montreal Protocols. 5,000 Francs or 332 SDR for the hand luggage of a traveler.

I. NATURE AND SCOPE OF WARSAW CONVENTION SCOPE: Applies to all international carriage of persons, luggage or goods performed by aircraft for reward. It applies equally to gratuitous carriage by aircraft performed by an air transport undertaking. International Carriage: Means any carriage in which, according to the contract made by the parties, the place of departure and the place of destination, whether or not there be a break in the carriage or a transshipment, are situated either within the territories of two High Contracting Parties, or within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory subject to the sovereignty, suzerainty, mandate or authority of another Power, even though that Power is not a party to this Convention.

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 The Warsaw Convention to which the Republic of the Philippines is a party and which has the force and effect of law in this country applies to all international transportation of persons, baggage or goods performed by an aircraft gratuitously or for hire.  When a contract of carriage is a contract of international transportation, provisions of the Convention automatically apply and exclusively govern the rights and liabilities of the airline and its passengers. (American Airlines vs. CA, G.R. No. 116044-45 March 9, 2000) Two categories of International Transportation covered: 1.) that where the place of departure and the place of destination are situated within the territories of two High Contracting Parties regardless of whether or not there be a break in the transportation or a transshipment; and 2.) that where the Overlordship place of departure and the place of destination are within the territory of a single High Contracting Party if there is an agreed Page 184

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stopping place within a territory subject to the sovereignty, mandate, or authority of another power, even though the power is not a party of the Convention. (Mapa vs. CA, G.R. No. 122308 July 8, 1997) (Lhuillier vs. British Airways, G.R. No. 171092 March 15, 2010) When the airline tickets evidencing the contract of transportation between Mapa and TWA, which were purchased in Bangkok, show the place of departure and the place of destination to be within the United States, the contract cannot come within the purview of the first category of “International Transportation.” The linkage of the contract to the Manila-Los Angeles travel tickets obtained by the Mapas from PAL cannot bring the arrangements within the second category, where the same were filled-up only by the Mapas in response to the query “Your Complete Intinerary” at the time they claimed for their lost pieces of baggage. (Mapa vs. CA, G.R. No. 122308 July 8, 1997)

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It does not however preclude operation of the Civil Code or other pertinent laws: Although the Warsaw Convention has the force and effect of law in this country, being a treaty commitment assumed by the Philippine government, said convention does not operate as an exclusive enumeration of the instances for declaring a carrier liable for breach of contract of carriage or as an absolute limit of the extent of that liability. The Warsaw Convention declares the carrier liable in the enumerated cases and under certain limitations. However, it must not be construed to preclude the operation of the Civil Code and pertinent laws. (PAL vs. CA, G.R. No. 119641 May 17, 1996) II. SALIENT ASPECTS OF THE WARSAW CONVENTION A. Provision on the valuation of cargo Article 22. (1) In the transportation of passengers, the liability of the carrier for each passenger shall be limited to the sum of 125,000 francs. Where in accordance with the law of the court to which the case is submitted, damages may be awarded in the form of periodical payments, the equivalent Page 185

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capital value of the said payments shall not exceed 125,000 francs. Nevertheless, by special contract, the carrier and the passenger may agree to a higher limit of liability. Art 25 (1) The carrier shall not be entitled to avail himself of the provisions of this Convention which exclude or limit his liability, if the damage is caused by his willful misconduct or by such default on his part as, in accordance with the law of the court to which the case is submitted, is considered equivalent to willful misconduct. Admittedly, in a contract of air carriage a declaration by the passenger of a higher value is needed to recover a greater amount, and that the air carrier is not liable for loss of baggage in an amount in excess of the limits specified in the tariff which was filed with the proper authorities, such tariff being binding on the passenger regardless of his lack of knowledge thereof or assent thereto. Nevertheless, there can be no blind reliance on adhesion of contracts where: 1.) the facts and circumstances justify that BAR OPERATIONS 2011

they should be disregarded; and 2.) when the benefits of limited liability have been waived when the air carrier failed to raise timely objections during the trial when questions and answers regarding the actual claims and damages sustained by the passenger were asked. (British Airways vs. CA, G.R. No. 121824 January 29, 1998) B. Provision on limiting liability The Convention's provisions do not "regulate or exclude the following areas: 1.) liability for other breaches of contract by the carrier; 2.) misconduct of its officers and employees; or 3.) for some particular or exceptional type of damage. (Northwest Airlines vs. CA, G.R. No. 120334 January 20, 1998) Varying views as regards misconduct: 1st View – Outside WC Coverage The Warsaw Convention denies to the carrier availment Page 186

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of the provisions which exclude or limit his liability, if the damage is caused by his willful misconduct or by such default on his part as, in accordance with the law of the court seized of the case, is considered to be equivalent to willful misconduct, or if the damage is similarly caused by any agent of the carrier acting within the scope of his employment. Under domestic law and jurisprudence (the Philippines being the country of destination), the attendance of gross negligence (given the equivalent of fraud or bad faith) holds the common carrier liable for all damages which can be reasonably attributed, although unforeseen, to the nonperformance of the obligation, including moral and exemplary damages. (Sabena Beligian World Airways vs. CA, G.R. No. 104685 March 14, 1996) 2nd View - Tortious conduct as ground for the petitioner’s complaint is within the purview of the Warsaw Convention (Lhuillier vs. British Airways, G.R. No. 171092 March 15, 2010)

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C. On limitation of time to file action Article 29. (1) The right to damages shall be extinguished if an action is not brought within two years, reckoned from the date of arrival at the destination, or from the date on which the aircraft ought to have arrived, or from the date on which the carriage stopped. (2) The method of calculating the period of limitation shall be determined by the law of the court to which the case is submitted. The two (2)-year limitation incorporated in Art. 29 as an absolute bar to suit and not to be made subject to the various tolling provisions of the laws of the forum. This therefore forecloses the application of our own rules on interruption of prescriptive periods. Article 29, par. (2), was intended only to let local laws determine whether an action had been commenced within the two (2)-year period. (United Airlines vs. Uy, G.R. No. 127768 November 19, 1999) Prescription of action covered by Warsaw convention distinguished from those arising from torts: Page 187

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Respondent's complaint reveals that he is suing on two (2) causes of action: (a) the shabby and humiliating treatment he received from petitioner's employees at the San Francisco Airport which caused him extreme embarrassment and social humiliation; and, (b) the slashing of his luggage and the loss of his personal effects amounting to US $5,310.00. While his second cause of action — an action for damages arising from theft or damage to property or goods — is well within the bounds of the Warsaw Convention, his first cause of action — an action for damages arising from the misconduct of the airline employees and the violation of respondent's rights as passenger — clearly is not. Consequently, insofar as the first cause of action is concerned, respondent's failure to file his complaint within the two (2)-year limitation of the Warsaw Convention does not bar his action since petitioner airline may still be held liable for breach of other provisions of the Civil Code which prescribe a different period or procedure for instituting the action, specifically, Art. 1146 thereof which prescribes four (4) years for filing an action BAR OPERATIONS 2011

based on torts. (United Airlines vs. Uy, G.R. No. 127768 November 19, 1999) Use of delaying tactics by the carrier won’t preclude enforcement of action even beyond the prescriptive period: Despite the express mandate of Art. 29 of the Warsaw Convention that an action for damages should be filed within two (2) years from the arrival at the place of destination, such rule shall not be applied in the instant case because of the delaying tactics employed by petitioner airline itself. (United Airlines vs. Uy, supra) IV. Jurisdiction of Local Courts under the Warsaw Convention Art. 1 (2) For the purposes of this Convention the expression "international carriage" means any carriage in which, according to the contract made by the parties, the place of departure and the place of destination, whether or not there be a break in the carriage or a transhipment, are situated either within the territories of two High Contracting Parties, or within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory subject to the sovereignty, suzerainty, mandate or authority of another Page 188

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Power, even though that Power is not a party to this Convention. A carriage without such an agreed stopping place between territories subject to the sovereignty, suzerainty, mandate or authority of the same High Contracting Party is not deemed to be international for the purposes of this Convention. (Emphasis supplied) Art. 17. The carrier shall be liable for damage sustained in the event of the death or wounding of a passenger or any other bodily injury suffered by a passenger, if the accident which caused the damage so sustained took place on board the aircraft or in the course of any of the operations of embarking or disembarking. Art 28 (1) An action for damages must be brought at the option of the plaintiff, in the territory of one of the High Contracting Parties, either before the court of the 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. “Destination” vs. “Agreed Stopping Place” Article 1(2) also draws a distinction between a "destination" and an "agreed BAR OPERATIONS 2011

stopping place." It is the "destination" and not an "agreed stopping place" that controls for purposes of ascertaining jurisdiction under the Convention. The contract is a single undivided operation, beginning with the place of departure and ending with the ultimate destination. The use of the singular in the expression indicates the understanding of the parties to the Convention that every contract of carriage has one place of departure and one place of destination. An intermediate place where the carriage may be broken is not regarded as a "place of destination." (Lhuillier vs. British Airways, G.R. No. 171092 March 15, 2010) Jurisdictional Character of Art. 28 We further held that Article 28(1) of the Warsaw Convention is jurisdictional in character. Thus: A number of reasons tend to support the characterization of Article 28(1) as a jurisdiction and not a venue provision. First, the wording of Article 32, which indicates the places where the action for damages "must" be brought, underscores the mandatory nature of Article 28(1). Second, this characterization is consistent with one of the objectives of the Convention, which is to "regulate Page 189

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in a uniform manner the conditions of international transportation by air." Third, the Convention does not contain any provision prescribing rules of jurisdiction other than Article 28(1), which means that the phrase "rules as to jurisdiction" used in Article 32 must refer only to Article 28(1). In fact, the last sentence of Article 32 specifically deals with the exclusive enumeration in Article 28(1) as "jurisdictions," which, as such, cannot be left to the will of the parties regardless of the time when the damage occurred. xxxx In other words, where the matter is governed by the Warsaw Convention, jurisdiction takes on a dual concept. Jurisdiction in the international sense must be established in accordance with Article 28(1) of the Warsaw Convention, following which the jurisdiction of a particular court must be established pursuant to the applicable domestic law. Only after the question of which court has jurisdiction is determined will the issue of venue be taken up. This second question shall be governed by the law of the court to which the case is submitted. (Lhuillier vs. British Airways, Supra.) PUBLIC SERVICE LAW

BAR OPERATIONS 2011

What is a public utility? (2000 Bar exams) A public utility is a business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph service. Apart from statutes which define the public utilities that are within the purview of such statutes, it would be difficult to construct a definition of a public utility which would fit every conceivable case. As its name indicates, however, the term public utility implies a public use and service to the public. (Am. Jur. 2d V. 64, p.549.) (Albano vs. Reyes) ORDINARY AND PRIMARY PURPOSE OF THE PUBLIC SERVICE LAW  ORDINARY PURPOSE: To subject public services to state control and regulation.  SPECIFIC PURPOSES: 1. To secure adequate, sustained service for the public at the least possible cost, and protect the public against unreasonable charges and poor inefficient service. 2. To protect and conserve investments which have already been made for public Page 190

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service, and prevent ruinous competition. BASIS OF THE LEGISLATIVE POWER TO REGULATE PUBLIC SERVICES:  POLICE POWER, for the protection of the public as well as the utilities themselves. (Pantranco v. P.S.C., 70 Phil 221)  CONSTITUTIONAL BASIS: 1. ARTICLE XII, SECTION 11: > A franchise, certificate, or any other form of authorization for the operation of public utility shall be granted to: - Filipino Citizens - Corporations or associations organized under Philippine Laws where at least 60% of the capital is owned by Filipino Citizens. - 100% Filipino Management > Mass media and commercial telecommunications shall be: - 100% Filipino Capital, and - 100% Filipino management BAR OPERATIONS 2011

2. ARTICLE XII, SEC 17: In times of national emergency, when the public interest so requires, the State may during the emergency and under reasonable terms, temporarily take over or direct the operation of any private owned public utility or business affected with public interests. 3. ARTICLE XII, SECTION 18 The state may, in the interest of national welfare or defense, establish and operate vital industries and upon payment of just compensation, transfer to public ownership utilities and other private enterprises to be operated by the government. 4. ARTICLE XII, SECTION 19 The state shall regulate or prohibit monopolies when the public interest so requires; no combination in restraint of trade or unfair competition shall be allowed Distinguish a Certificate of Public Convenience from a Certificate of Public Convenience and Necesssity A CPC is issued whenever the Commission finds that the operation of the proposed public service will promote the public Page 191

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interests in a proper and suitable manner, for which a municipal or legislative franchise is not necessary. On the other hand, CPCN is issued upon approval of any political subdivision of the Philippines when in the judgment of the Commission, such franchise or privilege will properly conserve the public interest (Perez, Transportation Laws and Public service Act). OFFICES NOW CHARGED WITH ENFORCEMENT OF PUBLIC SERVICE LAW The Public Service Commission has been abolished. The following replaced it: 1. LAND TRANSPORTATIONDepartment of Transportation and Communication (DOTC) and the Land Transportation Franchising and Regulatory Board (LTFRB) 2. WATER TRANSPORTATIONMaritime Industry Authority (MARINA) 3. AIR TRANSPORTATION- Air Transportation Office (ATO) headed by an assistant secretary and the Civil Aeronautics Board, which has been placed under the DOTC as an attached agency. 4. TELECOMMUNICATIONSNational Telecommunications Commission, which has been BAR OPERATIONS 2011

placed under the DOTC as an attached agency. 5. ENERGY- Board of Energy but transferred to the Energy Regulatory Board (ERB) 6. WATERWORKSNational Water Resources Council LIMITATIONS ON THE POWERS OF THE REGULATORY BOARDS, COMMISSIONS AND COUNCILS: 1. General: Powers are limited from those granted in the legislation creating the body. 2. Constitutional: Regulations imposed must not have the effect of depriving an owner of his property without due process of law nor confiscating or appropriating private property without just compensation. 3. Judicial: Boards, commissions are not judicial tribunals and therefore cannot determine judicial questions such as validity of contract. 4. Jurisdiction: Extends only to persons engaged in public utilities, or over a public utility, which holds a Certificate of Public Convenience. B.

JURISDICTION

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 General Rule: Over persons engaged in public utilities, or over a public utility, which holds a Certificate of Public Convenience.  Exemption: violators of a valid regulation promulgated under the law Distinguish Legislative Franchise from a CPC ● A franchise is a grant or privilege from the sovereign power, while the certificate is a form of regulation through an administrative agency. ● A franchise is a property right and cannot be revoked or forfeited without due process of law (PLDT, Co. v. NTC and CELLCOM, Inc. (Express Telecommunications Co., Inc. G.R. No. 88404, 18 October 1990), whereas a CPC or a CPCN as far as the interest of the State is concerned , constitutes neither a franchise nor a contract, confers no property right, and is a mere license or a privilege. The holder of said certificate does not acquire a property right in the route covered thereby. Nor does it confer upon the holder any proprietary right or interests or franchise in the public highways. Revocation of this certificate deprives him of no vested right. New and additional burdens alteration of the certificate, or even revocation or annulment thereof is reserved to the State BAR OPERATIONS 2011

(Lugue v. Villegas, G.R. No. L22545, 28 November 1969). Essentials before Granting a CPC/ CPCN 1. The granter must be a citizen of the Philippines or entity sixty percent of which is owned by such citizens. 2. The grantee must have sufficient financial capability to undertake the service and, 3. The service will promote public interests and convenience in a proper and suitable manner. Note: The overriding principle is a public interest, necessity and convenience (Sundiang & Aquino, Reviewer on Commercial Law). Coverage of CPC ● a ferry boat service is considered as a continuation of the highway when crossing rivers or lakes , which are small bodies of water; hence a land transportation company is no longer required to secure a separate CPC in order to operate a ferry boat for the use of its buses. Grounds for Revocation of Certificate 1. The holder violates or contumaciously refuses to comply with any order, rule or regulation of the

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commission. (Sec.16(n)of Public Service Act) 2. The holder is a mere dummy. 3. The operator ceased operation and placed his buses on storage; or 4. The operator abandons totally the service. (Manzanal v. Ausejo, No. L31056, August 4, 1988). Unlawful Acts of Public Utility Companies 1. Engagement in public service business without first securing the proper certificate 2. Providing or maintaining unsafe, improper or inadequate service as determined by the proper authority 3. Committing any act of unreasonable and unjust preferential treatment to any particular person, corporation or entity as determined by the proper authority 4. Refusing or neglecting to carry public mail upon request (Secs.18 &19). Prior Old Operator Rule Before permitting a new operator to invade the territory of another already established with a CPC, the prior operator must first be given the opportunity to extend its service in order to meet public needs in the matter of transportation. It means that a BAR OPERATIONS 2011

public utility operator should be shielded from ruinous competition by affording him the opportunity to improve his equipment and service before allowing a new operator to serve in the same territory he covers (Mandaluyong Bus Co. v. Francisco). The law contemplates that the first licensee will be protected in his investment and will not be subjected to a ruinous competition. It is not therefore the policy of the law to issue a CPC to a second operator to cover the same field and in competition with a first operator who is rendering sufficient, adequate and satisfactory service, and who in all things and respects is complying with the rules and regulations of the commission. The old operator must be given the opportunity to improve and extend his lines. (Batangas Trans Co. v Orlanes, 52 Phil 455) BASIS OF THE PRIOR OPERATOR RULE Prevent ruinous and wasteful competition and interest of public will be preserved. EXCEPTIONS TO THE PRIOR OPERATOR RULE:

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1. Operator fails/ neglects to make improvement or affect the increase in service when given the opportunity. 2. When Prior operator offers to meet increases in demand only when another operator offered to render additional service 3. Abandonment of operation 4. Prior operators did not oppose application 5. Prior operator cannot satisfy needs of the public 6. When opportunity to improve service is raised by prior operator only on appeal. 7. CPC granted to the applicant is a maiden franchise covering a new route, albeit overlapping with that of the old operator 8. Expiration of corporate existence of prior operator. 9. Monopoly 10. Pass age through private subdivision which granted permit to another Prior Applicant Rule Where there are various applicants for a public utility over the same authority, all conditions being equal, priority in the filing of the application for a certificate of public convenience becomes an important factor in granting or refusal of a certificate of convenience and the Commission is authorized to determine which of the applicants can best meet BAR OPERATIONS 2011

the requirements of public convenience (delos Santos v. Pasay Trans. Co.). Protection of Investment Rule One of the purposes of the Public Service Act is to protect and conserve investments which have already been made for that purpose by public service operators Registered Owner Rule The registered owner of a certificate of a public convenience is liable to the public for the injuries or damages suffered by third persons caused by the operation of said vehicle, even though the same had been transferred to a third person. The registered owner is not allowed to escape responsibility by proving that a third person is the actual and real owner. The registered owner is the lawful operator insofar as the public and third persons are concerned; consequently, it is directly and primarily responsible for the consequences of its operation. In contemplation of law, the owner/operator of record is the employer of the driver, the actual operator and employer being considered as merely its agent. The same principle applies even if the registered of any vehicle does not use it for public service (Equitable Leasing Corp. v. Suyom, G. R. No.143360, Page 195

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September 5, 2002), or otherwise stated, to privatelyowned vehicles. A sale, lease or financial lease that is not registered with the LTO does not bind third persons who are aggrieved in tortuous incidents, for the latter need only to rely on the public registration of a motor vehicle as conclusive evidence of ownership. A lease is an encumbrance in contemplation of law, which needs to be registered in order for it to bind third parties (PCI Leasing Corp and Finance Inc. v. UCPB General Insurance Co., Inc. G.R. No. 162267, 4 July 2008). Registered Owner had Recourse against Vendee/ Transferee A registered owner who has already sold or transferred a vehicle has a recourse to a thirdparty complaint, in the same action brought against him to recover for the damage or injury done, against the vendee or transferee of the vehicle (Villanueva v. Domingo, 438 SCRA 485, 2004). Kabit System( 2005 Bar exams) It is an arrangement whereby a person who has been granted a certificate of public convenience allows other persons who own motor vehicles to operate under such license, for a fee or percentage of such BAR OPERATIONS 2011

earnings. Although the parties to such agreement are not out rightly penalized by law,the kabit system is invariably recognized as being contrary to public policy and therefore void and inexistent under Art.1409, New Civil Code ( Lim v. C.A. G.R.No. 125817, 16 January 2002) Effects 1. The transfer, sale, lease or assignment of the privilege granted is valid between the contracting parties but not upon the public or third persons (Gelisan v. Alday No.L- 30212, 30 September 1987) 2. The registered owner is primarily liable for all the consequences flowing from the operations of the carrier. The public has the right to assume that the registered owner is the actual or lawful owner thereof. It would be very difficult and often impossible, as a particular matter, for the public to enforce their rights of action for injuries inflicted by the vehicle if they should be required to prove who the actual owner is (Benedicto v. IAC G.R No. 70876, 19 July 1990). 3. The thrust of the law in enjoining the Kabit system is to identify the person upon whom responsibility may be fixed with the end in view of Page 196

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protecting the riding public.(Lim v. C.A. G.R. No 125817, 16 January 2002) 4. Application of Article 1412 of the NCC or in pari delicto rule. The registered owner cannot recover from the actual owner and the latter cannot obtain transfer of the vehicle to himself, both being in pari delicto. (Teja Marketing Vs. IAC) 5. For the better protection of the public, both the registered owner and the actual owner are jointly and severally liable with the driver (Zamboanga Transporatation Co. v. C.A, 29 November 1969) 6. The determining factor which negates the existence of Kabit system is the possession of the franchise to operate and not the issuance of one SS I.D. Number for both bus line (Baliwag Transit V. C.A, 7 January 1987) Requisites for the Inapplicability of the Kabit System 1. When neither of the parties to the pernicious Kabit system is being held liable for damages. 2. When the case arose from the negligence of another vehicle using the public road to which no representation or misrepresentation as BAR OPERATIONS 2011

regards the ownership and operation of passenger jeepney was made. 3. When the riding public was not bothered of inconvenienced at the very least by the illegal arrangement (Lim v. C.A. 16 January 2002) Boundary System 1. The driver does not receive a fixed wage but gets only the excess of the receipt of the fares collected by him over the amount he pays to the jeep owner. 2. The gasoline consumed by the jeep is for the account of the driver. These two features are not sufficient to withdraw the relationship between the owner and the driver from that of employer and employee. The jeepney owner is subsidiarily liable as employer in accordance with Art.103 of RPC (Magboo v. Bernardo, 30 April 1963). Indeed to exempt from liability the owner of public vehicle who operates it under the boundary system on the ground that he is a mere lessor would be not only to abet flagrant violations of the public service law, but also to take place the riding public at the mercy of reckless and irresponsible drivers (Spouses Henandez v. Spouses Dolor, 30 July 2004) Page 197

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The Civil Aeronautics Board is expressly authorized by R.A. No. 776 to issue a temporary operating permit of certificate of Public Convenience and Necessity (PAL v. CAB 26 March 1997) The Legislature has delegated to the defunct Public Service Commission and presently the LTFRB, the power of fixing rates of public services. But nowhere under the provisions of law are the regulatory bodies, the PSC and LTFRB alike, authorized to delegate that power to a common carrier like transport operator, or other public service (KMU Labor v. Garcia, 23 December 1984). A public Utility is entitled to reasonable compensation in return for the service it provides and that it may exact reasonable charges in accordance with the service provided of the rates established therefore. In computing the just and reasonable rates to be charged by a public utility, three major factors are to be considered: 1). Rate of Return; 20. The rate base, 3) the return itself or the computed revenue to be earned by the public utility based on the rate of return and base rate (Davao Light and Power Company, Inc., 3 April 2003)

BAR OPERATIONS 2011

A rate is just and reasonable if it conforms to the following requirements: 1. One which yields to the carrier a fair return upon the value of the property employed in performing the service; and 2. One which is fair to the public for the service rendered. Service of a Public Utility considered Unlawful It shall be unlawful for any public service to provide or maintain ant service that is unsafe, improper, or inadequate, or withhold or refuse any service which can be reasonably be demanded and furnished as founded and determined by the Commission in a final order which shall be conclusive and shall effect and shall effect in accordance with this Act, upon Appeal for otherwise (Sec.19 (a) Public Service Act) Certificate of Public Convenience and Necessity a. A certificate of Public Convenience is issued where no special government franchise is required. b. A certificate of Certificate of Public Convenience and Necessity is issued where the public service would require in its operation the use of government property, such as the installation of Page 198

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electric and telephone posts and lines along public streets requiring a previous franchise therefore c. No certificate is necessary where the service of utility is owned, operated and managed for a private use or where the owner is not engaged in public service. Liability of Registered Owner and Authorized Operator under the Kabit System and Boundary System Both the registered owner and the Authorized operator of a common carrier under the Kabit System are jointly and severally (solidarily) liable for any death or injury to the passengers and loss/damage to the goods. Under the Boundary System the authorized operator of a common carrier is liable for the conduct of the driver, there being an employer-employee relationship between the operator and the driver. SPECIAL COMMERCIAL LAWS LETTERS OF CREDIT 1. 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 BAR OPERATIONS 2011

and promises to repay the person advancing the money. 1.1 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. This is known as the rule of strict compliance 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 such as: (a) a draft which is also called a bill of exchange, is an order written by an exporter/seller instructing an importer/buyer or its agent to pay a specified amount of money at a specified time (b) a bill of lading, which is a document issued to the exporter by a common carrier transporting the merchandise, and (c) invoices. 1.2 The issuing bank in determining compliance with the terms of the 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, Page 199

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independent of any breach of the main sales contract. This known as the independence principle in a letter of credit transaction. 2. The primary purpose of a letter of credit is to substitute for, and therefore support, the agreement of the buyer-importer to pay money under a contract or other arrangement.This instrument is basically a credit security through availment of credit facilities of the participating banks. 3. The 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 and to surrender the documents to 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. 3.1. In an international credit transaction carried through a letter of credit, the parties are: (a) The Customer- who is the party who applies to a bank in one country for the opening of a letter BAR OPERATIONS 2011

of credit in favor of the seller in another country (b) The Issuing Bank- is the bank in the country of the customer to which the customer applies for the issuance of a letter of credit (c) The Beneficiary- who is the party in another country who is the creditor of the customer. Usually, he is the one selling goods to the customer (d) 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 (e) The Confirming/Correspondent Bankis 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. 3.2 The relationships of the parties are to be governed as follows: (a)Issuing bank and applicant/buyer/importer – Their relationship is governed by the terms of the application and agreement for the issuance of the letter of credit by the bank. Unless the contrary is provided for, the liability of the issuing bank is solidary with the buyer (b) Issuing bank and beneficiary/seller/exporter – Their relationship is governed by the terms of the letter of credit Page 200

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issued by the bank, and (c) Applicant and beneficiary – Their relationship is governed by the sales contract. 3.3 It is clearly settled in law that there are thus three contracts which make up the letter of credit transaction: The contract between buyer and seller, buyer and issuing bank, and the letter of credit proper. These transactions are to be maintained in a state of perpetual separation. 4. The essential conditions of a letter of credit are: (a) That it be issued in favor of a definite person and not to order; and (b) That it be limited to a fixed and specified amount, or to one or more undetermined amounts, but within a maximum the limits of which has to be stated exactly. 4.1 Hence, a letter of credit is not a negotiable instrument because it is required to be drawn in favor of a definite person. 4.2 Those which do not have any of the essential conditions shall be considered merely as a letter of recommendation. 4.3 The bank or drawer of a letter of credit shall be liable to the person on whom it was issued for the amount paid by virtue thereof, within the maximum fixed therein, while a notifying BAR OPERATIONS 2011

bank does not incur any liability except to notify the beneficiary of the letter of credit. Before paying, it shall have the right to demand the proof of the identity of the person in whose favor the letter of credit is issued. 4.4 The drawer of a letter of credit may annul it, informing the bearer and the person to whom it is addressed of such revocation. The waiver of the right to annul makes the letter of credit irrevocable 4.5 The bearer of a letter of credit shall pay the amount received to the drawer without delay. Should he not do so, an action involving execution may be brought to recover it, with legal interest and current exchange in the place where payment was made on the place where it is repaid. 4.6 A letter of credit becomes void if the bearer of a letter of credit does not make use thereof within the period agreed upon with the drawer, or, in default of a period fixed, within 6 months counted from its date, in any point in the Philippines, and within 12 months anywhere outside thereof, it shall be void in fact and in law. 5. A standby letter of credit is a bank-issued option on a loan involving three parties: the bank Page 201

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issuing the credit, the party requesting for such issuance (otherwise known as the account party) and the beneficiary. Under the terms of standby letter of credit (SLC), the beneficiary has the right to trigger the loan option (referred to as taking down the loan) if the account party fails to meet its commitment, in which case the issuing bank disburses a specified sum to the beneficiary and books an equivalent loan to its customer. SLCs may support nonfinancial obligations such as those of bidders, or financial obligations such as those of borrowers. In the latter case, the borrower purchases an SLC and names the lender as beneficiary. Should the borrower default, the beneficiary has the right to take down the SLC and receive the principal balance from the issuing. 5.1 Another definition is that it is a bank-issued option on a loan involving three parties: the bank issuing the credit, the party requesting for such issuance (account party) and the beneficiary. Under its terms, the beneficiary has the right to trigger the loan option if the account party fails to meet its commitment, in which the case the issuing bank disburses a specified sum to the beneficiary and books an equivalent loan to its customer. BAR OPERATIONS 2011

6. The common types of letters of credit are: (a) Irrevocable vs. revocable – An irrevocable letter of credit obligates the issuing bank to honor drafts drawn in compliance with the credit and can be neither cancelled nor modified without the consent of all parties, including in particular the beneficiary/exporter. A revocable letter of credit can be cancelled or amended at any time before payment; it is intended to serve as a means of arranging payment but not as a guarantee of payment (b) Confirmed vs. unconfirmed – A letter of credit issued by one bank can be confirmed by another, in which case both banks are obligated to honor drafts drawn in compliance with the credit. An unconfirmed letter of credit is the obligation only of the issuing bank. Why would an exporter want a foreign bank’s letter of credit confirmed by a domestic bank? One reason could be if he has doubts 6.1 Other types: (a) Revolving Letter of Credit-one that provides for renewed credit to become available as soon as the opening bank has advised the negotiating or paying bank that the drafts already drawn by the beneficiary have been reimbursed to the opening bank by the buyer (b) Back to Back Letter of Credit- a credit with identical documentary requirements and covering the Page 202

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same merchandise as another letter of credit, except for the difference in price of the merchandise as shown by the invoice and draft. The second letter of credit can only be negotiated after the first is negotiated.

1. A trust receipt is a commercial document whereby the bank releases the goods in the possession of the entrustee but retains ownership thereof while the entrustee shall sell the goods and apply the proceeds for the full payment of the liability to the bank.

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 gods, 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.

1.1 It is a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchases of merchandise, and who may not be able to acquire credit, except through utilization, as collaterals, of the merchandise imported or purchased.

2.1 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.

1.2 The subject matter of a trust receipt is always chattel. It will not apply to chattel so attached to land so as to become part thereof.

2.2 A trust receipt transaction distinguished from:(a) A pledgein a pledge, the person doing the financing has possession of the property; in a trust receipt, the property is in the possession of the person financed (b) A conditional sale-in a conditional

TRUST RECEIPTS

2. A trust receipt transaction is a transaction between an entruster and an entrustee BAR OPERATIONS 2011

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sale, there is a sale of the property from the seller to the buyer; in a trust receipt, there is no sale of the property from the entruster to the entrustee (c) A chattel mortgage-a chattel mortgage involves the creation of a lien upon the property; a trust receipt does not involve the creation of a lien (d) A consignment-in a consignment, the consignor retains title to the property to secure the indebtedness due from the consignee; in a trust receipt, the seller does not retain title to the property but transfers such title to the entruster, not to the entrustee 2.3 When a debtor has received the goods from a supplier thereby acquiring title and will after borrow money from a bank to pay for the same, the transaction is a loan even he signs a trust receipt agreement. It is essential for a trust receipt transaction for the bank to first acquire ownership and possession. 2.4 When a Memorandum of Agreement is entered between a debtor corporation and a creditor bank is entered into rescheduling the payments due from the former, the trust receipt transaction is novated and transformed into a simple loan. 3. The parties to a trust receipt transaction are: (a) The entruster- is the person holding BAR OPERATIONS 2011

title over the goods, documents or instruments subject to a trust receipt transaction, and any successor in interest of such person, and (b) The entrustee – is the person having or taking possession of goods, documents or instruments under a trust receipt transaction, and any successor in interest of such person for the purpose or purposes specified in the trust receipt 4. The rights of the entruster are: (a) to be entitled to receive the proceeds of the sale of the goods released under a trust receipt to the entrustee to the extent of the amount owing to the entruster (b) to the return of the said goods, in case they could not be sold; and (c) to cancel the trust in case the entrustee defaults, take possession of the goods, and sell the same at public or private sale. 4.1 The process of taking possession and selling the goods is as follows: (a) the entruster may cancel the trust and take possession of the goods, documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee (b) The Page 204

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entruster in possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention to sell, and may, not less than five days after serving or sending of such notice, sell the goods, documents or instruments at public or private sale, and the entruster may, at a public sale, become a purchaser. Notice of the sale shall be deemed sufficiently given if in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the entrustee’s last known business address (c) the proceeds of any such sale, whether public or private, shall be applied (1) to the payment of the expenses thereof; (2) to the payment of the expenses of retaking, keeping and storing the goods, documents or instruments; (3) to the satisfaction of the entrustee’s indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. 4.2 Cancellation of the trust receipt and repossession is not essential for the entruster to have a cause of action against the entrustee. They are options available to the entruster and do not prejudice resort to other remedies. 5. The obligations of the entrustee are as follows: (a) to BAR OPERATIONS 2011

hold the goods in trust for the entruster and to dispose of them strictly in accordance with the terms of the trust receipt; This includes the authority to manufacture or process the goods with the purpose of ultimate sale. Provided, however, that the entruster retains title over the goods whether in its original or processed form until the entrustee has complied with the obligation under the receipt. It also includes authority to load, unload, ship or transship or otherwise deal with the goods in a manner preliminary or necessary to their sale (b) 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 (c) to insure the goods for their total value against loss from fire, theft, pilferage or other casualties (d) to keep the goods or the proceeds thereof, whether in money or whatever form, separate and capable of identification as property of the entruster; and (e) to return the goods,to the entruster in case they could not be sold or upon demand of the entruster. 5.1 Notwithstanding the security interest of the entruster, the entrustee shall be responsible as principal or as vendor under any sale or contract to sell made by the entrustee. Hence, although Page 205

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the entrustee is not the owner of the goods under a trust receipt (ownership is retained by the entrustor) anyone who acquires the goods from the entrustee acquires good title (ownership) over the goods. Note that it runs counter to the provisions of Article 1505 of the Civil Code, where there is a contract of sale, the buyer is to acquire only whatever title the seller had at the time the sale was perfected. 5.2 Risk of loss shall aslso be borne by the entrustee. Hence, the loss of goods, documents, or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof. This is not in accordance with the civil law principle that it is generally the owner who must bear the risk of loss of the object 6. A trust receipt arrangement does not involve a simple loan transaction between a creditor and debtor-importer. The law warrants the validity of the trust receipt agreement. Consequently, the goods covered by the trust receipt cannot be levied upon by the creditors of the entrustee. The validity of entruster’s security interest as against creditors-the entruster’s security interest in BAR OPERATIONS 2011

goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement. 7. The acts punishable by the Trust Receipts Law as Estafa as defined by Article 315, Section 1(b) of the Revised Penal Code are: (a) The failure to comply with the provision referring to the obligation involving the duty to deliver (entregaria) the money received to the owner of the merchandise sold, or(b)The failure to comply with the provision referring to the obligation involving the duty to return (devolvera) the goods to the owner if not disposed of in accordance with the terms of the trust receipt. 7.1 There is no need to prove intent to defraud as the offense is malum prohibitum. 7.2 There is also no need to prove damage to the entrustor because the nature of a trust receipt transaction and the damage caused to trade circles and the banking community in case of a violation thereof is the basis for the criminal offense. 7.3 Consequently, the law has consistently been declared as not violating the constitutional proscription against Page 206

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imprisonment for non-payment of debt. It is a declaration by the legislative authority that, as a matter of public policy, the failure of a person to turn over the proceeds of the sale of goods covered by the receipt or to return the goods if not sold is a public nuisance to be abated by penal sanctions. WAREHOUSE RECEIPTS: 1. The purpose of the Warehouse Receipts Law is to regulate the status, rights and liabilities of parties. In particular, it prescribes the rights and duties of a warehouseman and to regulate his relationship with (a) the depositor of the goods, or (b) the holder of a warehouse receipt, or (c) the person lawfully entitled to the possession of the goods, or (d) other persons. It also covers all warehouses, whether bonded or not. 1.2 As far as the effect of the New Civil Code provisions on documents of title to goods which include quedans or warehouse receipts, there is no conflict between the two. The Warehouse Receipts Law refers to and will apply to warehouse receipts issued by warehouseman, while the New Civil Code refers to and will apply to receipts that are not issued by warehouseman.

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2. The purpose of the General Bonded Warehouse Act is to regulate the business of receiving commodities for storage in order to protect persons who may want to avail themselves of warehouse facilities and to encourage the establishment of more warehouses. 2.1 Distinguishing between the 2 laws, the Warehouse Receipts Law refers to the rights and obligations of parties in a warehousing contract, while the General Bonded Warehouse Act refers to state regulation and supervision of warehouses 3. A warehouse receipt is a written acknowledgment by a warehouseman that he holds certain goods in store for the person to whom the document is issued. This is also known as “warehouse-keeper’s receipt” or “storage receipt.” 3.1 While no particular form is required, it should however include the necessary terms stating: (a) Location of the warehouse (b) Date of issue (c) Number of receipt (d) Description of the goods (e) Advances made (f) Rate of charges (g) Ownership of the goods by language indicating if the warehouseman is an owner, solely or jointly with others, of the goods deposited (h) Signature of the warehouseman, and (i) Person to whom goods Page 207

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should be delivered by language indicating whether the receipt is negotiable or non-negotiable, that is whether the goods received will be delivered to the bearer, to a specified person, or to a specified person or his order 3.2 A negotiable warehouse receipt is not a negotiable instrument as the same does not comply with the requisites of Section 1, Act 2031. However, ownership thereof may be transferred by delivery if it states that it is deliverable to bearer or a named person or bearer. If it is deliverable to a named person or order, ownership may be transferred by special endorsement and delivery. The endorsement can be to bearer or to a specified person. 3.3 A negotiable warehouse receipt is not convertible to a non-negotiable receipt. The insertion of a provision making it non-negotiable is void. To make a warehouse receipt nonnegotiable, it must be written out as such and to prevent any person from supposing it to be negotiable, the words “nonnegotiable” should be placed plainly on its face. A nonnegotiable receipt may only be assigned. 3.4 The advantages of a negotiable warehouse receipt over one which is non-negotiable BAR OPERATIONS 2011

are: (a) goods cannot be garnished or levied upon under execution unless receipt is surrendered, or impounded or its negotiation enjoined (Section 25, Warehouse Receipts Law) (b) In case of negotiation, holder acquires the direct obligation of the warehouseman to hold possession of the goods for him (Section 41, Warehouse Receipts Law), and (c) Goods are not subject to vendor’s lien or stoppage “in transitu” (Section 49, Warehouse Receipts Law) 3.5 Other terms may be included in a warehouse receipt, except: (a) terms that are contrary to the provisions of this Act, or (b) terms which will in anyway impair the obligation to exercise due care in the safekeeping of the goods entrusted to the warehouseman. 4. A warehouseman defined - is a person lawfully engaged in the business of storing goods for profit. Under the General Bonded Warehouse Act he is defined as a person lawfully engaged in the business of storing goods for profit. In other words, he is one who receives and stores goods owned by others and collects fees for so doing. 4.1 Included in the phrase “the business of receiving commodity for storage” includes any contract or transaction wherein: (a) the Page 208

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warehouseman is to return same commodity deposited or pay its value (b) the commodity is to be milled for the owner thereof, or (c) the commodity delivered is commingled with the commodity belonging to other persons, and the warehouseman is obligated to return commodity of the same kind or pay its value. 5. The Primary Obligations of the Warehouseman are:(a) he must issue a receipt for any commodity that he receives for storage (b) he must exercise that degree of care in the safekeeping of the goods entrusted to him which a reasonable careful man would exercise in regard to similar goods of his own. However, in the absence of an agreement to the contrary, he shall not be liable for any loss or injury to the goods which could not have been avoided by the exercise of such care (c) In the absence of any lawful excuse, he is bound to deliver the goods upon a demand by: (1) holder of a receipt for the goods, or (2) by the depositor, provided that the demand be accompanied by (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. BAR OPERATIONS 2011

5.1 A warehouseman is obliged to deliver goods to: (a) person lawfully entitled to it. Examples: person determined by the court to be entitled to it in an interpleader case, 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. 5.2 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. The warehouseman can refuse to deliver to any of the claimants until he has had a reasonable to ascertain the validity of the claims.

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5.3 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. 5.4 A warehouseman can protect against a misdelivery by: (a) availing of a the reasonable time that he is entitled to within which to ascertain the validity of an adverse claim or to bring legal proceedings to force the claimants to interplead or may actually require the claimants to interplead. 5.5 A warehouseman cannot commingle as he is bound to keep the goods of a depositor separate from the goods of other depositors or from the goods of the same depositor for which a separate receipt has been issued. The purpose of the prohibition is to permit inspection and redelivery at all times. Exceptions are: (a) the goods are fungible, as when any unit of the good is from its nature or mercantile usage, treated as an equivalent of any other unit (Section 58, Warehouse Receipts Law) or (b) it is BAR OPERATIONS 2011

authorized custom.

by

agreement

or

6. For failure to take up and cancel a negotiable receipt, or one the negotiation of which would transfer the right to the possession of the goods when goods are delivered (Section 11, Warehouse Receipts Law) or for the failure to take up and cancel a negotiable receipt or to place upon it a statement of what goods have been delivered, when goods are partly delivered (Section 12, Warehouse Receipts Law). The warehouseman shall be liable for failure to deliver the goods to anyone who purchases for value in good faith such receipt whether such purchaser acquired title to the receipt before or after the delivery of the goods by warehouseman 6.1 Exception: The warehouseman shall not be liable for failure to deliver the goods covered by the receipt or be guilty of a crime where the goods (a) have been lawfully sold to satisfy the warehouseman’s lien, or (b) have been lawfully sold or disposed of because of their perishable or hazardous nature (Section 36, Warehouse Receipts Law) 7. An alteration in a warehouse receipt is said to be:(a) Immaterial if it does not change the tenor of the warehouse Page 210

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receipt (b)Material if it substantially changes the tenor of the receipt (c) Authorized if it is made with the authority of the holder and the warehouseman (d)Unauthorized if it is made without the authority of the holder and warehouseman. This may be material or immaterial (e) Fraudulent if it is made with malice or bad faith by the holder with intent to defraud subsequent holders (f) Without fraudulent intent if its is made without malice or bad faith

be liable according to the terms of the receipts as originally issued even (1) to a purchaser of the receipt for value without notice of the alteration, or (2) to the person who made the alteration and to any person who took it with notice of the alteration. However, in the latter case, such material and fraudulent alteration shall excuse the warehouseman from any other liability to the said persons. Except as regards the alterer and subsequent holders with notices.

7.1 The effects of an alteration in a warehouse receipt are: (a)Where the alteration is immaterial, the warehouseman shall be liable according to the terms of the receipt as originally issued (b)Where the alteration is immaterial, whether fraudulent or not, authorized or not, the warehouseman is liable according to the terms of the receipt as originally issued (c) Where the alteration is material and is authorized, the warehouseman shall be liable according to the terms of the receipts as altered (d) Where the alteration is material, unauthorized but without fraudulent intent, the warehouseman shall be liable according to the terms of the receipts as they were before the alteration (e) Where the alteration is material, unauthorized and with fraudulent intent, the warehouseman shall

8. For the non-existence or misdescription of goods, a warehouseman shall be liable to the holder of a receipt for damages caused by the nonexistence of the goods or by the failure of the goods to correspond with the description thereof in the receipt at the time of its issue.

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8.1 Exception: No such liability shall attach to the warehouseman if the goods are described in the receipt merely (a) by a statement of the marks or labels upon them or upon the packages containing them, or (b) by a statement that the goods are of a certain kind or that the packages containing the goods contain goods of a certain kind or by words of similar import. 9. The warehouseman’s lien refers to the lien of that a warehouseman has on the goods Page 211

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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. 9.1 The basis for the lien is the obligation of the depositor to pay the warehouseman for (a) Storage and preservation charges (b) Money advanced (c) Interest (d) Insurance (e) Transportation (f) Labor (g) Weighing, and (h)Coopering and other similar charges (Section 27, Warehouse Receipts Law) 9.2 With the exception of storage and preservation charges, the other claims must be expressly specified in the warehouse receipt for it to serve as basis for the lien (Section 30, Warehouse Receipts Law) 9.3 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 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 (Section 28, Warehouse Receipts Law). Hence, it is enforceable against the depositor’s goods and the goods of other persons stored by BAR OPERATIONS 2011

depositor, if pledge of such goods by him are valid but not against the true owner if the depositor has neither title nor right of possession to the goods (Section 31, Warehouse Receipts Law; Young v. Colyear, 201 Pac. 623) 9.4 The warehouseman can enforce his lien by the sale of the goods (Section 33, Warehouse Receipts Law) or by an action in court (Section 35, Warehouse Receipts Law). Provided, however, that notice of sale of goods in order to satisfy the warehouseman’s lien is given. 9.5 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 (Section 29, Warehouse Receipts Law) 9.6 The effect of the sale of goods to satisfy the warehouseman’s lien or on account of the goods’ perishable or hazardous nature under Section 36 shall not make the warehouseman, after the sale, liable for failure to deliver the goods to the depositor, or owner of the goods, or to the holder of a receipt given for the goods when they were deposited, even if such receipt were negotiable. Page 212

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10. A negotiable receipt is negotiated by delivery when: (a) the goods are deliverable to bearer, or (b) the goods are deliverable to a specified person and the latter has indorsed it in blank or to bearer. If endorsed as deliverable to a person, the bearer receipt is transformed into a an order receipt. 10.1 A negotiable receipt is negotiated by indorsement when the goods are, by the terms of the receipt, deliverable to a specified person (Section 38, Warehouse Receipts Law) 10.2 The negotiation may be made by the: (a) owner or (b) the person to whom possession of the receipt was entrusted by the owner (Section 40, Warehouse Receipts Law) 10.3 The rights acquired by one to whom a negotiable warehouse receipt has been duly negotiated are: (a) Such title to the goods as the one negotiating could convey to a purchaser in good faith for value (b) Such title to the goods as the depositor or one to whose order the goods were to be delivered could convey to a purchaser in good faith for value, and (c) Direct obligation of the warehouseman to hold the goods for him as if the warehouseman contracted with him directly. Hence, a person to whom a warehouse receipt has been BAR OPERATIONS 2011

negotiated by one who has stolen the goods stated in the receipt cannot claim a misdelivery if the warehouseman delivers the goods to the rightful owner, who is the person lawfully entitled to it. 10.4 Mortgagee or pledgee of a warehouse receipt to whom a negotiable warehouse receipt has been indorsed does not acquire title over the goods. He only acquires the rights of a pledgee or mortgagee, namely to foreclose the pledge or mortgage. The intent in this case is not the negotiation of the receipt with its consequent transfer of title, but merely as security (Martinez v. P.N.B., 93 Phil. 765); P.N.B. v. Atendido, 94 Phil. 254) 11. A non-negotiable receipt is transferred by delivery accompanied with a deed of assignment or transfer. If this is indorsed, the indorsement will not give the transferee any right whatsoever (Section 39, Warehouse Receipts Law) 11.1 Rights acquired by a person to whom a warehouse receipt has been transferred but not negotiated are: (a) Title to the goods subject to the terms of any agreement with the transferor, and (b)The right to notify the warehouseman of the transfer in his favor and thereby acquire the direct obligation of the warehouseman to hold the goods Page 213

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for him (Section 42, Warehouse Receipts Law). Note that pending notification, his rights can still be defeated by a subsequent attaching creditor, or levy on execution, a vendor’s lien or right of stoppage in transitu. CHATTEL MORTGAGES: 1. A chattel mortgage defined personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. 1.1 If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage. 1.2 Distinguishing a chattel mortgage from a pledge: (a) the chattel mortgage is recorded in the Chattel Mortgage Register; the pledge is not, instead the movable is delivered to the creditor (b) in a chattel mortgage, the consent of the mortgagee to the sale of the thing mortgaged must be in writing and annotated on the back of the mortgage instrument; in pledge, the consent of the pledge need not be in writing but may be oral (c) in a chattel mortgage, in addition to other formal requirements, the mortgagor must execute an affidavit of good faith; in pledge, there is no requirement that the pledgor execute such an affidavit BAR OPERATIONS 2011

(d) in a chattel mortgage, in case of foreclosure of the thing mortgaged, the mortgagee is not entitled to the entire proceeds of the sale but only to a portion thereof sufficient to pay the mortgage debt, interest and incidental expenses; in pledge, the pledgee is entitled to the entire proceeds of the sale even if it exceeds the amount of the debt (e) in a chattel mortgagee, the mortgagee is entitled to recover deficiency as a rule; in pledge, the pledgee is not entitled to recover deficiency. 1.3 Distinguishing a chattel mortgage from a real estate mortgage: (a) in a chattel mortgage, the thing mortgaged must be personal or movable property; in a real estate mortgage, the thing mortgaged must be real or immovable property (b) an affidavit of good faith is required to be executed in a chattel mortgage but not in a real estate mortgage (c) in a chattel mortgage, the mortgagor cannot alienate the thing mortgaged without the written consent of the mortgagee annotated on the back of the mortgage instrument; in real estate mortgage, the mortgagor can alienate the thing mortgaged without the consent of the mortgagee and any stipulation prohibiting such alienation is void (d) in a chattel mortgage, redemption of the thing Page 214

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mortgaged may be made only before the sale thereof; in real estate mortgage, the thing mortgaged may be redeemed after it is judicially sold but before judicial confirmation of the sale, or if extrajudicially sold, within one year from and after the date of sale (except where the mortgagor is juridical person whose property has been mortgaged in favor of a bank, quasi-bank or trust entity, in which case the redemption shall be made until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more 3 months after foreclosure whichever is earlier) 2. The essential requisites of a chattel mortgage are: (a) It must be constituted to secure the fulfillment of a principal obligation (b) The mortgagor must be absolute owner of the property mortgaged (c) The mortgagor must have free disposal of such property, or be legally authorized for the purpose (d)The property involved must be personal or movable, and (e) Contract must be recorded in the Chattel Mortgage Register 2.1 A chattel mortgage which provides that the security stated therein is for the payment of any and all obligations therein before contracted and which may BAR OPERATIONS 2011

thereafter be contracted, or future debts and obligations, by the mortgagor in favor of the mortgagee is void. The law requires parties to a mortgage to execute an affidavit of good faith, that the debt is honestly due and owing. A valid mortgage cannot be made to secure a debt to be contracted in the future (Jaca v. Davao Lumber, L-25771, March 29, 1982, 113 SCRA 107; Vide; Lopez v. CA, 114 SCRA 671, Co v. PNB, 114 SCRA 842). An affidavit of good faith is a certificate included in the chattel mortgage contract executed by both mortgagor and mortgagee that the mortgage is constituted to secure the specified obligation, and that said obligation is a valid, just and subsisting obligation and not one entered into for the purpose of fraud. 2.2 Although a promise expressed in the chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be acted upon, the security itself does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by a fresh chattel mortgage deed or by amending the old contract to conform to the law, particularly the execution of an affidavit of good faith (Acme Shoe etal v. CA, GR No. 103576, August 22, 1996) Page 215

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2.3. The chattel mortgage cannot be considered to include afteracquired properties as it shall cover only the property described in the deed and not any other like or substituted property (Section 7). Recognized as exceptions are: (1) properties that are perishable, like fruits or subject to inevitable wear and tear like tires or intended to be sold or used but with the understanding that they would be replaced with similar properties to be thereafter acquired by the mortgagor. An Example is: Where the debtor gives as security the stock or merchandise in his store and it is the “intention” of the parties that the mortgage shall cover the stock that will take its place in the course of the business. [Torres v. Limjap, 56 Phil. 141 ,1931] (2) In the case of other properties, if their inclusion is expressly stipulated and a supplement to the mortgage specifically listing and describing the property is executed and registered in the chattel mortgage register 2.4 The registration in the chattel mortgage register is not necessary to make it binding between the parties. It is necessary though to make it binding on third persons. 3. The remedies of a creditor are: (a) Extrajudicial Foreclosure (b) An action for replevin (c) BAR OPERATIONS 2011

Judicial Foreclosure, and (d) Bring an action for the payment of a sum of money 3.1 A creditor cannot forceably take possession of the chattel without court intervention (BPI Credit v. CA, 204 SCRA 601, Filinvest Credit Corporation v. CA, 248 SCRA 549) 3.2 Neither can the creditor take possession and appropriate the chattel, since it would constitute pactum commissorium, referring to an act or a stipulation giving power to the creditor to appropriate the thing given as security, if the principal obligation is not fulfilled without any formality, such as foreclosure proceedings and public sale. Such an act or stipulation is null and void (Art. 2088, N.C.C.). In other words, the mortgagor’s default does not operate to vest in the mortgagee the ownership of the mortgaged property. 3.3 Availment of the remedy of bringing an action to collect a sum of money is a waiver or abandonment of the chattel mortgage. This also bars the recovery of a deficiency judgment which is only available when the proceeds of the sale are insufficient to cover the debts pursuant to a foreclosure. The prescriptive period for which is ten (10) years. Page 216

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3.4. Note that when the financing company to whom a loan and chattel mortgage have been refinanced had been constituted as the attorney-in-fact of the borrower to file any insurance claim covering the chattel, and it failed to do so upon a total loss of the same, will relieve the borrower-mortgagor of his obligation (BA Finance Corporation v. CA, 201 SCRA 157) 3.5 There are limitations on the enforcement of chattel mortgages executed in relation to the sale of personal property in installments, where the remedies are: (1) Exact fulfillment of the obligation (2)Cancel the sale, should the vendee’s failure to pay cover two or more installments; or (3) Foreclose the chattel mortgage on the thing sold should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void (Art. 1484, N.C.C.). This remedies are exclusive not alternative. EXTRA-JUDICIAL FORECLOSURE OF REAL ESTATE MORTGAGES: 1. The resort to the process of extra-judicial foreclosure emanates from the presence of a stipulation that allows the BAR OPERATIONS 2011

creditor/mortgagee to extrajudicially foreclose and designating the said party as the attorney-in-fact of the mortgagor to cause the same and to sell the subject property at a foreclosure sale by an insertion into or attachment to the real estate mortgage. 1.1 When a debt is secured by a real estate mortgage, the creditor has two options: (a) to foreclose, or (b) file an ordinary action to collect. If he avails of the option to foreclose, he is still allowed to bring a claim for any deficiency. On the other hand, if he avails of the option to file an ordinary action, he abandons or waives his mortgage lien, without prejudice to his levying on the same property but subject to the rights of other creditors, if any. 1.2 When the mortgagor files a criminal case for violation of BP Blg 22 against the mortgage debtor, he is deemed to have already availed himself of the remedy of a collection suit, and following the rule on alternative remedies, he is barred from subsequently resorting to an action for foreclosure. 1.3 A mortgage contract is, by nature, indivisible. The debtor who has paid cannot ask for a proportionate extinguishment of the mortgage as long as the debt is not completely satisfied. Page 217

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Generally, the divisibility of the principal obligation is not affected by the indivisibility of the mortgage. 2. The foreclosed property shall be redeemed within 1 year from and after the date of the sale (Sec. 6). The aforementioned date of sale has been construed by the Supreme Court to mean the date of registration of the sheriff’s certificate of foreclosure sale in the office of the Register of Deeds concerned (Reyes vs. Noblejas, et al., G.R. No. L-23691, November 25, 1967). Note that the period for redemption may be the subject of an extension as may be agreed upon by the parties. 2.1 The amount to be paid at redemption is the Bid Price, plus 12% interest per annum. Note again that under RA 8791, the redemption amount is such which is due under the mortgage deed with interest at the specified rate therein. 2.2 Redemption may be effected by: (a) The debtor, or (b) His successor in interest , or (c) Any judicial creditor or judgment creditor of the debtor, or (d) Any person having a lien on the property subsequent to the mortgage. 2.3 Notwithstanding foregoing provision, BAR OPERATIONS 2011

the juridical

persons whose property is sold pursuant to an extra-judicial foreclosure, shall have the right to redeem the property until, but not after, the registration of the certificate of foreclosure sale which in no case shall be more than three (3) months after foreclosure whichever is earlier, as provided in Section 47 of Republic Act. No. 8791 (A.M. No.99-10-05-0) 2.4 Note the probable constitutional challenges that may be brought against the quoted provision of RA 8791 on the basis of the equal protection clause as there is no substantive distinction between a corporate and individual debtor or between a bank or non-bank lender. 2.5 Further, the application of the law should be prospective as a corporate mortgagor has acquired as vested right to the one year redemption period if his mortgage was executed prior to RA 8791 as the controlling consideration is the law on redemption at the time of the execution of the mortgage. 2.6 The purchaser of foreclosed property is not automatically entitled to the possession thereof during the redemption period as he must petition the Regional Trial Court of the province or city where the property is situated to give him possession thereof Page 218

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during the redemption period. He must also put up a bond equivalent in value to the use of the property for a period of 12 months to indemnify the debtor in case it is shown that the sale was made without complying with the requirements of Act No. 3135 or that there was no violation of the mortgage deed. 3. In general, formal and substantive defects in the real estate mortgage and the foreclosure proceedings provide the legal and equitable grounds to enjoin or eventually nullify foreclosure proceedings, if not the real estate mortgage itself. 3.1 The general basis would be Article 5, Civil Code, which provides: Acts executed against the provisions of mandatory or prohibitory laws shall be void, except, when the law authorizes their validity 4. Disputes in the amount of the obligation may cause the foreclosure to be enjoined as a bank may legally proceed with foreclosure only when the exact amount of the obligation of the mortgagor is determined in a trial on the merits and the mortgagor cannot meet the obligation following that determination. 4.1 Where the debtor is not given an opportunity to settle the BAR OPERATIONS 2011

debt at the correct amount and without iniquitous interest imposed, no foreclosure proceedings can be instituted. 4.2 The total amount due on the mortgage is also undetermined if some of the properties are subject to the coverage of the CARP, in which case a portion of the mortgage indebtedness will be assumed by the government up to the amount equivalent to the landowner’s compensation. Hence, until the final valuation of the lands subject to CARP is determined, the amount of the mortgage debt is unliquidated 5. Issue of the legality of the Floating Rate of Interest, which refers to the rate of interest periodically fixed by a bank based on the prevailing interest rate in the market, such as the Manila Reference Rate or Treasury Bill Rate, plus a margin as determined by the bank. 5.1 If this rate of interest is unilaterally fixed by the bank for each interest period without the written conformity of the borrower, the interest may be declared null and void for being potestative and for lack of mutuality based on essential equality between the parties 5.2 Its being a potestative condition (one within the sole power of the one obligated to Page 219

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perform), consequently null and void finds basis in Article 1308 of the Civil Code that provides that the fulfillment of a condition cannot be left to the sole will of one of the contracting parties 5.3 As held by the Supreme Court in Almeda v. Court of Appeals and PNB,256 SCRA 293: The binding effect of any agreement between the parties to contract is premised on two settled principles: (1) that any obligation arising from contract has the force of law between the parties; and (2) that there must be mutuality between the parties based on their essential equality. Any contract which appears to be heavily weighted in favor of one of the parties so as to lead to an unconscionable result is void. Any stipulation regarding the validity or compliance of the contract which is left solely to the will of one of the parties is likewise invalid. 5.4 The floating rate of interest being unilaterally fixed and determined by the bank also violates the provision of CB Circular No. 1191 that the interest rate for each re-pricing period is subject to mutual agreement between the Borrower and the Bank. 5.5 Under Article 1956 of the Civil Code, no interest is due unless it has been expressly BAR OPERATIONS 2011

stipulated in writing. The floating rate being unilaterally fixed by the Bank without the written mutual agreement of the Borrower for each re-pricing of interest is null and void under Art. 1956 of the Civil Code, and for violation of CB Circular No. 1191 that the interest rate for each re-pricing period under the floating rate of interest in subject to mutual agreement. 5.6 Consequently, if the interest is declared null and void, the foreclosure sale for a higher amount than what is legally due is likewise null and void because under the Civil Code, a mortgage may be foreclosed only to enforce the fulfillment of the obligation for whose security it was constituted. 5.7 In fact, because there is a dispute on the amount of the interest legally due, the Bank may legally proceed with foreclosure or consolidation only when the exact amount of the obligations of the Mortgagor is determined after trial on the merit and the mortgagor cannot meet the obligation following that determination. 6. Issue of the mortgage as security for future loans. The rule is unless a continuing real estate mortgage is involved, a real estate mortgage is not a valid security Page 220

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for future loans under the so called “Dragnet Clause”. 6.1 This finds basis in the fact that real estate mortgage is an accessory contract, which cannot exist independently of the principal obligation. The consideration for the mortgage is the consideration of the contract of loan. Consequently, the amount of the loan must be specified, otherwise the contract of loan, as well as the accessory contract of mortgage, shall not be perfected for lack of consideration with respect to the unspecified loan in the future. The Supreme Court has held in China Banking Corporation vs. Lichuaco, 46 Phil 460 that: a mortgage is an accessory contract, its consideration is the very consideration of the principal contract, from which it derives life, and without which it cannot exist as an independent contract. 6.2 Further, under Article 2176 of the Civil Code, a mortgage may only be foreclosed for the fulfillment of the obligation for whose security it was constituted 6.3 Mortgages with a dragnet clause is a contract of adhesion that must be strictly construed as against the bank. 6.4 To constitute a real estate mortgage as security for future loans, the future loans must be BAR OPERATIONS 2011

agreed upon and fixed in the mortgage deed at the time of the execution of the same 6.5 A stipulation that the amounts named as consideration in a contract of mortgage do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered is valid and binding and is known in American Jurisprudence as the “blanket mortgage clause”. 7. Issue of PD 385 prohibiting the issuance of an injunction against foreclosure by any government financial institution is arbitrary and unreasonable. Hence, may be argued as being unconstitutional. Hence, it cannot be sustained if there is a clear legal ground to restrain foreclosure 8. Issue of the right to take possession. The rule is that the purchaser still has to file a petition for the issuance of a writ of possession to obtain possession. 8.1 The proceedings related thereto allow the mortgagor to participate although jurisprudence provides that the hearings are ex-parte. However, with the mandate of Section 8 of Act 3135 which allow the Page 221

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mortgagor to set aside foreclosure in the same proceedings, it is the better rule to actually allow the mortgagor’s active participation. 8.2 The obligation of the court to issue a writ of possession in favor of the purchaser in an extrajudicial foreclosure sale ceases to be ministerial once it is shown that there is a third party in possession of the property who is claiming a right adverse to that of the mortgagor and that such third party is a stranger to the foreclosure proceedings in which the ex-parte writ of possession was applied for. 8.3 As a limitation on the right to possession, a writ of possession may be legally issued only if the debtor is in possession and no third person has intervened. 8.4 Order granting a writ of possession under Act 3135 is a final order. Hence, it is appealable. In expropriation, it is interlocutory. 9. Grounds for the proper annulment of the foreclosure sale are the following: (a) there was fraud, collusion, accident, mutual mistake, breach of trust or misconduct by the purchaser (b) the sale was not fairly and regularly conducted (c) price was inadequate and the inadequacy BAR OPERATIONS 2011

was so great as to shock the conscience of the court. Central Bank Act 1. The law was enacted on June 14, 1993 and has for its policy the maintenance of a central monetary authority with the power: (a) function and operate as an independent and accountable body in the discharge of its responsibilities concerning money, banking and credit (b) enjoy fiscal and administrative autonomy. 1.1 A central bank is a bank that holds the cash reserves of a country’s commercial banks, performs monetary services for the government, issues bank notes, and makes funds available to commercial banks Conservatorship 1. The appointintment by the Monetary Board of a conservator 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. 1.1 It is an attempt to save the bank from bankruptcy and ultimate liquidation.

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1.2 The appointed conservator is to take charge of the assets, liabilities, and the management thereof for a period not exceeding one (1) year 2. A conservator may take over a bank or quasi-bank without the need of first declaring the bank insolvent (P.D. 1937, June 27, 1984). Nonetheless, the designation of a conservator is not a precondition to the designation of a receiver (Section 30) 2.1 A conservator is the person appointed to take over the management of a bank and shall assume exclusive powers to oversee every aspect of the bank’s operation and affairs.1 3. The conservatorship is terminated when: (a) When Monetary Board is satisfied that institution can continue to operate on its own and the conservatorship is no longer necessary (b)Should Monetary Board determine that the continuance in business of the institution would involve probable loss to its depositors or creditors, in which case proceedings for receivership and liquidation shall be pursued. (Sec. 29). Proceedings in Receivership: 1

1. Receivership ensues whenever the Monetary Board finds that a bank or quasi-bank: (a) Is unable to pay its liabilities as they become due in the ordinary course of business BUT: Shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community (b) Has insufficient realizable assets to meet its liabilities (c) Cannot continue in business without involving probable losses to its depositors or creditors; or (d) Has willfully violated a cease and desist order that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution; 1.1 In which cases, the Monetary Board may summarily and without need for prior hearing, forbid the institution from doing business in the Philippines and designate the PDIC as receiver of the banking institution. 1.2 There is no requirement that a hearing be first conducted before a banking institution may be placed under receivership. The appointment of a receiver may be made by the Monetary Board without notice and hearing but its action is subject to judicial inquiry( Rural Bank of Buhi v. Court of Appeals,162 SCRA 288)

Central Bank vs. CA, 208 SCRA 652

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1.3 The Central Bank, through the Monetary Board, is vested with exclusive authority to assess, evaluate and determine the condition of any bank and if it finds the condition to be one of insolvency, or its continuance in business would involve probable loss to creditors and depositors, it can forbid the bank to do business and can designate a receiver to take charge of its assets and liabilities. Sec. 29 of the Central Bank Act does not contemplate prior notice and hearing before a bank is placed under receivership. It is enough that such action is made the subject of a subsequent judicial review. “Close now and hear later” scheme under the Act is for the purpose of protecting the depositors, creditors, stockholders and general public (Central Bank v. Court of Appeals, 220 SCRA 536) 1.4 Prior notice and hearing is not required before placement of bank under receivership. Section 29 does not contemplate prior notice and hearing before a bank may be directed to stop operation and placed under receivership. When paragraph 4 (now paragraph 5 as amended by E.O. 289) provides for the filing of a case within ten (10) days after the receiver takes charge of the assets of the bank, it is unmistakable that the assailed actions should precede the filing of the case. Plainly, the legislature could not BAR OPERATIONS 2011

have intended to authorize “no prior notice and hearing” in the closure of the bank and at the same time allow a suit to annul it on the basis of absence thereof (CB vs. CA, 220 SCRA 539) 1.5 Judicial review is allowed to determine the presence of arbitrariness and bad faith in placing bank under receivership. Admittedly, the mere filing of a case for receivership by Central Bank can trigger a bank run. The procedure prescribed in Section 29 is truly designed to protect the interest of all concerned, and the summary closure pales in comparison to the protection afforded public interest. At any rate, the bank is given full opportunity to prove arbitrariness and bad faith in placing the bank under receivership, in which event, the resolution may be properly nullified and the receivership lifted as the trial court may determine. Until such determination is made, the status quo shall be maintained, i.e., the bank shall continue to be under receivership. 1.6 Receivership is equivalent to an injunction to restrain in the bank officers from intermeddling with the property of the bank in any way. Thus, the appointment of a receiver operates to suspend the authority of the bank and of Page 224

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its directors and officers over its property and effects (Villanueva vs. CA, 244 SCRA 395) Liquidation: 1. Liquidation shall take place is the receiver determines that the institution cannot be rehabilitated or permitted to resume business, the Monetary Board shall notify in writing the Board of Directors of its findings and direct the receiver to proceed with the liquidation of the institution. 2. The following are the mandatory requirements to be complied with before a bank found to be insolvent can be ordered close: (1) an examination shall be conducted by the appropriate CB department as to the condition of the bank (2) disclosed in the examination is that the condition of the bank is one of insolvency (3) the director shall inform the Monetary Board in writing of such fact, and (4) the Monetary Board shall find the statement of the department to be true (Banco Filipino vs. Monetary Board, 204 SCRA 767) 3. The test of insolvency laid down in Section 29 of the Central Bank Act (now Section 30 of the New Central Bank Act) is measured by determining whether the realizable assets, realizable within a reasonable BAR OPERATIONS 2011

time by a reasonably prudent person of a bank are less than its liabilities, not considering capital stock and surplus which are not liabilities for such purpose. (Ibid) 4. Upon liquidation, the receiver shall then: (a) File ex parte with Regional Trial Court, and without the requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to a liquidation plan adopted by PDIC (b) Upon acquiring jurisdiction, RTC shall, upon motion by the institution, assist the enforcement of individual liabilities of the stockholders, directors and officers, and decide on other issues as may be material to implement the liquidation plan adopted (c)Convert the assets of the institution to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code (d) Institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution Selected Issues involving Receivership and Liquidation: 1. If the Central Bank (now Bangko Sentral) through its Monetary Board has promised to Page 225

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rehabilitate the distressed bank, and the stockholders on said assurance proceeded to mortgage their real properties to guarantee CB promised loan advances to said bank, CB cannot renege on said promise, under the doctrine of promissory estoppel, and cannot insist in its liquidation (Ramos vs. CB, 41 SCRA 565) 2. Where the Central Bank, in the course of the rehabilitation of a commercial bank, extended loans and advances, but subsequently the bank was forced by CB to close, and subsequently allowed to reopen, interest due on said loans and advances, cannot be collected because it should be deemed read into every contract of deposit with a bank that the obligation to pay interest on a deposit ceases from the moment the operation of the bank is completely suspended by the duly constituted authority the Central Bank (Ibid,; Overseas Bank vs. CA, 105 SCRA 49) 3. The prescriptive period to institute the foreclosure proceeding was legally interrupted when the mortgageebank was placed under receivership with express prohibition from transacting business, a circumstance considered as force majeure (Provident vs. CA, 222 SCRA 125)

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4. While the closure and liquidation of a bank may be considered an exercise of police power, the validity of its exercise is subject to judicial determination, and could be set aside, if it is capricious, discriminatory, whimsical, arbitrary, unjust or a denial of the due process and equal protection clauses of the Constitution (CB vs. CA, 106 SCRA 143) 5. A deposit in a distressed bank already forbidden by CB to do business does not become a preferred credit simply because some depositors went to court and were able to secure judgments against the bank (CB vs. Morfe, 63 SCRA 114) 6. Where in the course of bank’s distressed condition, the Central Bank gave financial assistance to restore the bank’s viability, but that inspite of these moves, the bank was closed by CB on August 1968, and allowed to reopen on January 8, 1981, under a new name, Commercial Bank of Manila, the obligation by the bank to pay interest on the CB advances remained suspended during the whole period of its closure, following the ruling in OBM vs. CA and Tapia (105 SCRA 49). Hence, the interest obligation starts to run from the date of the reopening of the bank on January 8, 1981 (Ramos vs. CB, 137 SCRA 685) Page 226

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General Banking Law 1. The policy of the State is the promotion and maintenance of a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy. 2. Banks are entities engaged in the lending of funds obtained in the form of deposits. 2.1 The definition under Section 2 of the old General Banking Law:2 banks are entities duly authorized by the Monetary Board to engage in the business of regularly lending funds obtained regularly from the public through the receipt of deposits of any kind. Thus, entities which lend funds obtained from the public but not as deposits but rather as debts for their own account, whether done regularly or not, and those which regularly lend funds obtained through the occasional receipt of deposits, would not be considered as banks. 2.2 An entity that is engaged in the business of buying accounts receivables and is funding their business from bonds sold to the public from time to time is not a 2

RA 337

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bank as it does not accept deposits, instead it buys receivables. Classification of Banks: 1. Banks are classified under the General Banking Law as follows: (a) Universal banks- these are those that used to be called expanded commercial banks and whose operations are now primarily governed by the GBL. They can exercise the powers of an investment house and invest in non-allied enterprises. They have the highest capitalization requirement. An investment house is a company that earns income solely or primarily by holding and investing in securities issued by other companies or by government agencies. (b) Commercial banks- these are ordinary or regular commercial banks, as distinguished from a universal bank. They have a lower capitalization requirement than universal banks and cannot exercise the powers of an investment house and invest in non-allied enterprises. (c) Thrift banks-these are savings and mortgage banks, stock savings and loan Page 227

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associations, and private development banks which are governed primarily by the Thrift Banks Act.3 (d) Rural banks-these are mandated to make needed credit available and readily accessible in the rural areas on reasonable terms and which are governed primarily by the Rural Banks Act of 1992.4 (e) Cooperative banks-these are banks organized primarily to make financial and credit services available to cooperative banks and are governed primarily by the Cooperative Code.5 (f) Islamic banks-these are banks whose business dealings and activities are subject to the basic principles and rulings of Islamic Shari’a, such as the Al Amanah Islamic Investment Bank of the Philippines which was created by the Republic Act No. 6848; and (g) Other classifications of banks as determined by the Monetary Board. Incorporation and Organization of Banks 1. The minimum conditions that a prospective bank must

comply with before it may be authorized by the BSP to be organized as a bank are: 1.1 That the entity must be organized as a stock corporation; 1.2 That its funds must be obtained from the public, i.e., 20 or more persons; and 1.3 That the minimum capital requirement prescribed by the Monetary Board for each category of banks are satisfied. 2. The SEC cannot register the the articles of incorporation of any bank, or any amendment thereto, unless accompanied by a certificate of authority issued by the Monetary Board, under its seal. Such certificate shall not be issued by the Monetary Board unless it is satisfied from the evidence submitted to it: 3. In organizing the bank, it can only issue par value stocks only. Supervision and Regulation of Banks: 1. The entity that has supervisory and regulatory powers over banks is the BSP and such extends to all banks, quasibanks, trust entities, and other financial institutions.

RA 7906 RA 7353 5 RA 6938 3 4

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2. This power of the BSP is found in Section 25 of the BSP Law which mandates the conduct of periodic or special examinations, to include those of its subsidiaries and affiliates engaged in allied activities, but such shall be possible only in the in the course of its examination of such bank. 2.1 A subsidiary corporation is one more than 50% of whose voting stock is owned by the bank or quasi-bank. 2.2 An affiliate corporation is one less than 50% of whose voting stock is owned by the bank or quasi-bank or which is related or linked to such bank or quasibank through common stockholders or such factors as may be determined by the Monetary Board.6 Management of a Bank: 1. The principle that since a bank is a juridical person that its powers are to be exercised, its business is to be conducted, and that its properties are to be held by a board as provided for by Section 23 of the Corporation Code obtains. 2. However, an independent director, who is a person other than an officer or employee of the

bank, its subsidiaries or affiliates or related interests must be elected to the board. Note that the term “independent director” is also used in the Securities Regulation Code7 to refer to a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. 3. There must also be adherence to the fit and proper rule8 which provides that to maintain the quality of bank management and afford better protection to depositors and the public in general, the Monetary Board shall: 3.1 prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit; or 3.2 After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position.

7 6

Section 25, NCBA

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8

Section 38, Par. 16.25 Section 16, GBL, BSP Circular No. 296

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3.3 In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his integrity, experience, education, training, and competence.

the extent of the foreign participation in its equity.12

4. An elective or appointive public official cannot serve as an officer of a private bank , whether full-time or part-time shall at the same time serve as officer of any private bank, save in cases where such service is incident to financial assistance provided by the government or a governmentowned or controlled corporation to the bank or unless otherwise provided under existing laws.

1. Single Borrower Limit Rules13- these rules regulate 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.

4.1 The Rural Banks Act9, allows an elected or appointive public official to serve as director, officer, consultant or in any other capacity in a rural bank. 5. A bank is required to have a board composed of 5 no more than 15 directors, two of whom must be independent directors.10 5.1 In case of a merger or consolidation between banks, the number of directors shall not exceed 21.11 5.2 Non Filipino citizens may become members of the board to Section 5, RA 7353 Section 15, GBL 11 Section 17, GBL

Limitations imposed on Banking Operations:

1.1 The rules seek 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.14 1.2 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, non-perishable goods which must be fully covered by insurance.

Section 15, Par. (2), GBL Section 35, GBL 14 BSP Circular No. 425

9

12

10

13

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2. DOSRI Rules15- these are rules promulgated by the BSP, upon the authority of Section 36 of the GBL, 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. 2.1 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. 2.2 Related Interests shall include the following: (a) Spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of a director, officer or stockholder of the bank; (b) Partnership of which a director, officer or stockholder or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, is a general partner; (c) Co-owner with the director, officer, stockholder or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of the property or interest or right mortgaged, pledged or assigned to secure the loans or credit accommodations, except when the mortgage, pledge or 15

Section 36, GBL

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assignment covers only said coowner’s undivided interest; (d) Corporation, association, or firm of which a director or officer of such corporation, association or firm, except (1) where the securities of such corporation, association or firm are listed and traded in the big board or commercial and industrial board of domestic stock exchanges less than fifty percent (50%) of the voting stock thereof is owned by any one person or by persons related to each other within the third degree of consanguinity or affinity; or (2) where the director, officer or stockholder of the lending bank sits as a representative of the bank in the board of directors of such corporation: Provided, That the bank representative shall not have any equity interest in the borrower corporation except for the minimum shares required by law, rules and regulations, or by the by-laws of the corporation: Provided, further, That the borrowing corporation under (1) or (2) is not among those mentioned in Items (e) and (f) hereof; (e) Corporation, association or firm of which any or a group of directors, officers, stockholders of the lending bank and/or their spouses or relatives within the first degree of consanguinity or affinity, or relative by legal adoption hold/own more than twenty percent (20%) of the subscribed Page 231

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capital of such corporation, or of the equity of such association or firm; (f) Corporation, association of firm wholly or majority-owned or controlled by any related entity or a group of related entities mentioned in Items (b), (d) and (e) hereof.

upon the records of the bank, i.e., the minutes of the board meeting in which the approval was given; and (c) A copy of the entry of such approval shall be transmitted forthwith to the appropriate supervising department of the BSP.

2.3 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 all the directors of the bank, excluding the director concerned.16 However, the written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the BSP.

2.5 The other conditions are: (a) The DOSRI borrower is required to waive the secrecy of his/her deposits of whatever nature in all banks in the Philippines17 and (b) The ceiling/limitation as to loans are followed.

2.4 Consequently, any director or officer who may wish to borrow from the bank must observe the following formalities: (a) The borrowing must be in accordance with the Arms Length Rule, or which must be upon terms not less favorable to the bank than those offered to others ,must be with the written approval of a majority of the bank’s board of directors, excluding the director concerned (b)Such approval must be entered 16

Section 36, GBL

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2.6 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; 2.7 Should there be a violation of the DOSRI rules, after due notice to the board of directors of the bank, the office of any bank director or officer who violated the rules may be declared vacant and the director or officer shall be subject to the penal provisions of NCBA. 17

Section 26, NCBA

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2.8 Loans, credit accommodations or guarantees extended by a bank to DOSRI are also termed as “Insider Lending.” Bank Deposits and Bank Responsibility to Depositors 1. 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.18 1.1 They are also considered in the nature of irregular deposits, they are really loans because they earn interest.19 Considering a deposit involves the delivery of a thing for safekeeping with the obligation to return the very same thing upon demand20 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.21 1.2 Banks may use the money deposited with them as money deposited in banks, whether fixed, savings and current, are really loans to a bank because the bank can use the same for its ordinary

transactions and for banking business in which it is engaged.22 1.3 In fact banks are not obligated to return exactly the money deposited in the same denomination as it was deposited. While the banks have the obligation to return the amount deposited, they have no obligation to return or deliver the same money deposited. Thus, estafa will not prosper.23 1.4 A bank’s failure to honor a deposit is failure to pay its obligation as debtor and not a breach of trust arising from a depository’s failure to return the subject matter of deposit 2. The relation created between the bank and depositor is that of a creditor and debtor with the bank as debtor and the depositor as creditor.24 2.1 The relationship is fiduciary in nature.25 The bank assumes to act as an agent for another and the other reposes confidence in him, although there is no written contract or nor contract at all. 3. A bank should exercise its functions and treat the accounts of their clients not only with the Tan Tiong Tick vs. Americal Apothecaries, 65 Phil 417 Guingona vs. City Fiscal, 128 SCRA 577 24 Serrano vs. Court of Appeals, 96 SCRA 96 25 PBCom vs. Court of Appeals, 269 SCRA 695, BPI vs. IAC, 206 SCRA 408 22

People vs. Ong, 204 SCRA 942 19 BPI vs. Court of Appeals, 232 SCRA 302 20 Article 1962, Civil Code 21 Article 1933, Civil Code 18

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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.26 3.1 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.27 3.2 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. 3.3 However, the highest degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors.28 3.4 In case of negligence in handling the deposit of its clients on account of a bank officer’s gross negligence which causes inconvenience, humiliation and embarrassment to a depositor BPI vs. Court of Appeals, 326 SCRA 641 Citytrust Banking vs. IAC, 232 SCRA 559 28 Reyes vs. Court of Appeals, GR No. 118492, August 15, 2001

entitles the latter to an award of damages.29 This notwithstanding the absence of malice and bad faith as if the negligence, nevertheless caused serious anxiety, embarrassment and humiliation to the depositors.30 As long as the bank has committed a serious mistake and the bank’s negligence was a result of lack of due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business as banking, it is liable for moral damages.31 3.5 In view of the fiduciary nature of the relationship of banks and its clients and because banking is imbued with public interest, a bank was also made liable for damages in the following instances: (a) Failure to honor/pay a check of a merchant/trader when the deposit is sufficient.32 Conversely, a bank is not liable for its refusal to pay a check on account of insufficient funds, notwithstanding the fact that a deposit may be made later in the day. Before a depositor may maintain a suit to recover a specific amount from his bank, he must first show that he had on deposit sufficient deposits to meet his demand. (b) When a bank teller validates an incomplete duplicate deposit slip Go vs. IAC, 197 SCRA 22 BPI vs. IAC, 206 SCRA 408 31 Prudential Bank vs. Court of Appeals, 328 SCRA 264 32 Moran vs. Court of Appeals, 230 SCRA 799

26

29

27

30

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that lacks the name of the account holder.33 (c) When the deposit of PPH 31,500.00 to cover six postdated checks was not credited to the account of the depositor because of the omission of one “zero” in the account number.34 (d) The bank allowed an impostor to negotiate treasury checks.35 (e) The new accounts teller erroneously used the old account of a depositor instead of the newly opened joined account of the depositor and his spouse, leading to the dishonor of two checks issued by the depositor.36 3.6 The defense of diligence in the selection and supervision of employees is not a valid defense to escape or at least mitigate a bank’s liability. A bank’s liability is not merely vicarious but primary; the defense of exercise of due diligence in the selection and supervision of its employees is of no moment. By the very nature of the work of banks, the degree of responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary clerks and employees. Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees.37

Philbank vs. Court of Appeals, 269 SCRA 695 Citytrust vs. IAC, 232 SCRA 559 35 Go vs. IAC, 197 SCRA 22 36 BPI vs. IAC, 206 SCRA 408 37 PCIBank vs. Court of Appeals, 350 SCRA 446

3.7 Malice and bad faith need not be proven sufficiently to make a bank liable for moral damages due to the error or negligence of a bank employee as long as the bank has committed a serious mistake and the bank’s negligence was a result of lack of due care and caution required of managers and employees of a firm engaged in so sensitive and demanding business as banking, it is liable for moral damages.38 4. A bank cannot prohibit a borrower from prepaying his loan as a borrower may at any time prior to the agreed maturity date prepay, in whole or in part, the unpaid balance of any bank loan and other credit accommodation, subject to such reasonable terms and conditions (such as the payment of a prepayment fee) as may be agreed upon between the bank and borrower. PDIC 1. The Philippine Deposit Insurance Corporation Act created the Philippine Deposit Insurance Corporation which is a government corporation promoting and safeguarding the interests of the depositing public by providing permanent and

33 34

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38

Prudential Bank vs. Court of Appeals, 328 SCRA 264

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continuing insurance coverage on all insured deposits.

DETERMINATION OF THE AMOUNT DUE THE DEPOSITOR

2. It insures the deposit liability of all banks to a maximum deposit insurance coverage (MDIC) of P500,000 per depositor in consideration of a premium paid by the bank to the said corporation.(As per RA 9576)

1. Insured deposits under the law means the net amount due the depositor for any deposits in the insured bank after deducting any offsets but should not exceed PHP 500,000.00.

3. The risk insured against is the closure of a bank. 3.1. The nature of the coverage is compulsory as the law provides that the deposit liabilities of any bank or banking institution which is engaged in the business of receiving deposits or which thereafter may engage in the business or receiving deposits, shall be insured with PDIC. 3.2 Deposits that are covered are savings accounts, current account, time deposits and deposits in acceptable foreign currencies pursuant to Foreign Currency Deposit Act. 3.3 Exempted though from the coverage of the law are trust funds as it was was expressly excluded from the term “deposit” under R.A. 7400 and money market placement as it is not included in the term “deposit”

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2. Hence, if a depositor has two or more accounts maintained in the same right and capacity, the coverage of PHP 500,000.00 shall be held to apply to the sum of all such accounts. 3. A joint account (whether “and/or, “or”, “and” shall be insured separately from any individual-owned account. If held by a juridical person or entity with a natural person, the account shall be presumed to belong to the juridical person. 3.1 Accounts under joint ownership is considered equally shared among co-depositors unless otherwise indicated in the deposit document. TRUTH IN LENDING Declared Policy of the State 1. The law, which is to be implemented by the Monetary Board of the Bangko Sentral ng Pilipinas declares that it is the Page 236

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policy of the state to protect its citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy. 2. Specifically, it: (a) aims to protect a debtor from the effects of misrepresentation or concealment (b) permits him to fully appreciate and evaluate the real cost of his borrowing (c) avoid the circumvention of usury laws Coverage of the Law 1. As used in the law, the term “credit” means: (a) loan, mortgage, deed of trust; advance or discount (b) conditional sales contract (c)contract to sell or contract of sale of property or services (d)rental-purchase contract (e)contract for hire, bailment or leasing of property (f) option, demand, lien, pledge or other claim against or for the delivery of property or money (g)purchase of acquisition of any credit upon security of any obligation arising out of any of the above (h) any transaction with similar purpose 2. The provisions of the law apply to creditors, who is defined by law as: any person engaged in the business of extending credit, BAR OPERATIONS 2011

including any person who as a regular business practice makes loans or sells or rents property or services on a time, credit or installment basis either as principal or agent, who requires as an incident to the extension of credit the payment of a finance charge. 2.1 The application of the law is compulsory for (a) banks (b) non-bank financial intermediaries authorized to engage in quasibanking are required strictly to adhere to the law. Banks and nonbank financial intermediaries authorized to engage in quasibanking functions are required to strictly adhere to the provisions of the “Truth in Lending Act” and shall make the true and effective cost of borrowing an integral part of every loan contract (Consolidated vs. CA, 246 SCRA 195) 3. The provisions of the law does not apply to the following credit transactions: a. those that do not involve the payment of any finance charge by the debtor; and b. those in which the debtor is the one specifying a definite and fixed set of credit terms such as bank deposits, insurance contracts, sale of bonds, etc.

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3.1 Finance charges (Sec. 3[3]; Sec. 2[h], CB Circular 158) are the amounts to be paid by the debtor incident to the extension of credit such as interests, discounts, collection fees, credit investigation fees and attorney’s fees. 3.2 Non Finance charges (Sec. 2[f], CB Circular 158) are the amounts advanced by a creditor for items normally associated with the ownership of property or the availment of the services purchased which are not incident to the extension of credit. For example, when a debtor purchases a car on credit, the creditor may advance the insurance premium as well as the registration fee for the account of the debtor. 4. To accomplish the policy of the law to protect citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost, a creditor or lender is obliged to provide the debtor or borrower with a statement in writing, before perfection of the contract containing the following: (a) Cash price of property or service to be acquired (b) Amount credited as down payment and or trade-in(c) Charges paid or to be paid not incident to the extension of credit (d) Charges paid or to be paid not incident to the extension BAR OPERATIONS 2011

of credit (e)Total amount to be financed (f) Finance charge; and (g)Percentage of finance charge to total amount to be financed. 4.1 The disclosure must be made in a separate document, and not one that is merely incorporated in a document by the statement that the transaction subjects the debtor to a finance charge. 4.2 The failure to comply does not render the principal contract invalid or unenforceable, but would entitle the debtor to recover any interest payment made. 4.3 A violation of the law may subject the violator to: (a) a civil action brought within one year to recover from the seller/lender an amount of P100.00 or double the finance charge imposed, whichever is greater, but not to exceed P2,000.00, plus attorney’s fees and costs, and (b) a criminal action against the seller/lender who if convicted may be imposed a fine ranging from P1,000 to P5,000 or imprisoned from 6 months to 1 year or both. Note that a final judgment that may be rendered in any criminal proceeding to the effect that the defendant has willfully violated the act shall be prima facie evidence against such defendant in an action or proceeding Page 238

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brought by any other party against such defendant under the Act as to all matters respecting which said judgment would be estoppel as between the parties thereto. THE ‘INSIDE STORY’ ON THE ‘SECRECY OF BANK DEPOSITS’ LAW Atty. Renato S. Rondez Partner, Law Firm of Rondez & Partners Professor, College of Law University of the Cordilleras ________________________________ QUESTIONS AND ANSWERS ON SECRECY OF BANK DEPOSITS-RA 1405 AND RELATED LAWS 1) What is the purpose of the law? The purpose of the law is to encourage people to deposit their money in banks and, thereby, discourage private hoarding so that the banks may lend out the money and assist in the economic development of the country39. 2) What does the law prohibit?

the Philippines including investments in bonds issued by the Government or its political subdivisions and instrumentalities by any person, government official, bureau or office40; and (b) The disclosure by any official or employee of any banking institution to any unauthorized person of any information concerning said deposits. Note that the law is applicable to trust accounts or an account that has been set up as an inter vivos or testamentary trust as Section 2 has been held to cover not only money that has been deposited but also to money which has been invested although no creditor-debtor relationship is created between the bank and the client.41 The law does not apply to money market placements as they are not deposits, rather, they are trades in short term negotiable instruments such as securities or treasury bills. 3) What disclosures or inquiries into deposits are not prohibited? a) Upon written permission of the depositor; b) In cases of impeachment;

(a) The examination and inquiry or looking into all deposits of whatever nature with banks or banking institutions in

Sec. 2, RA 1405. Ejercito vs. Sandiganbayan, GR Nos. 157294-95, November 30, 2006 40 41

39

Sec. 1, RA 1405.

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c) Upon order of a competent court in cases of bribery or dereliction of duty of public officials; d) In cases where the money deposited or invested is the subject matter of litigation42; e) Upon order of the court or subpoena issued by the Ombudsman in cases of unexplained wealth43; This is subject to the following requisites: (1) only an incamera inspection is allowed (2) there must be a pending case before a court of competent jurisdiction (3) account is clearly identified (4) examination is limited to account subject of the court case, and (5) bank personnel and the account holder must be notified to be present during the inspection. f) Upon order of the Commissioner of Internal Revenue in respect of the bank deposit’s of a decedent for the purpose of determining such decedent’s gross estate44; g) Upon order of the Commissioner of Internal Revenue when a taxpayer files an application to compromise his tax liability by reason of financial incapacity45; Sec. 2, RA 1405. Sec. 6, RA 3019; PNB vs Gancayco, 15 SCRA 91, Marquez vs. Disierto, 399 SCRA 772 44 Sec. 6, NIRC. 45 Sec. 6, NIRC.

h) Upon examination made in the course of a special or general audit of a bank as authorized by the Monetary Board after being satisfied that there is reasonable ground to believe that a bank fraud or irregularity is being committed and it has become necessary to look into the deposit to establish the same; i) Upon examination of a bank’s independent auditor, the result of which are for the exclusive use of the bank; j) In case of suspicious transactions under the AntiMoney Laundering Law46; k) Under the Anti-Money Laundering Law where banks are required to report to the Anti-Money Laundering Council any transaction in cash or other equivalent monetary instrument in excess of P500,000 in any one day47; l) Also under the MoneyLaundering Law, the AntiMoney Laundering Council may inquire into a deposit or investment maintained with any financial institution upon order of a competent court, in cases of violation of the Act, when there is probable cause that the deposit or investment is in

42 43

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46 47

Sec. 3 (b-1) , RA 9160. Sec. 3 (b), RA 9160.

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any way related to an unlawful activity as defined in the Act or a money laundering offense under the Act48; m) When a director, officer, stockholder, and related interest (DOSRI) obtains a loan from his bank or its subsidiaries, or with related controlling interests of more than 5% of the capital or surplus of the bank, it shall constitute a waiver of secrecy of all his deposits of whatever nature in all banks in the Philippines; and n) Under the Unclaimed Balances Law49. o) The examination of a bank account under Section 10, Rule 57 in relation to the examination of a party whose property is attached and persons indebted to a defendant or controlling his property.50

Note also, that since investigations by the Monetary Board and the Bureau of Internal Revenue are confidential in nature, any disclosure in violation of the confidentiality will create liability.

4) Who are primarily liable for violations of the law?

No, the deposits made by a depositor in a safety deposit box are not the deposits contemplated by the law as the bank is never in possession or control of the contents of the safety deposit box in this instance, the depositor is merely leasing the deposit box from the bank.

The persons primarily liable for a violation of the law would be a bank employee or officer and the person, government officer, agency or office looking into the deposit when not authorized by any of the exceptions to the law. Sec. 1, RA 9160. RA 3936. 50 Onate vs. Abrogar, 230 SCRA 181

5) Will the garnishment of a bank deposit violate the law? No, garnishment of a bank deposit will not violate the law. If the existence of the deposit is disclosed, the same is considered as purely incidental to the execution process51. What is to be disclosed only is the existence of the deposit, particularly whether or not it is sufficient to satisfy the garnishment. Hence, a disclosure of the balance may constitute a violation of the law. 6) Is a depositor with a safety deposit box protected by the law?

48 49

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51

China Banking Corp. vs Court of Appeals, 193 SCRA 454

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Prevailing jurisprudence is that the ensuing relationship between the bank renting out the safety deposit box and the client with respect to the contents of the box is that of bailor-bailee, the bailment being for hire and mutual benefit. The bank would be liable for loss of the contents of the box if it is guilty of fraud, negligence or delay or contravention of the tenor of the agreement.52 NOTE: Without order of a court of competent jurisdiction, disclose to any authorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity; Provided, that with respect to bank deposits, the provisions of existing laws shall prevail53. 7) Would the examination of the bank deposits of another person in connection with an inquiry into illegally acquired property of the defendant in anti-graft cases violate the law? The permitted inquiry into illegally acquired property in antigraft cases extends to instances where such property is concealed by being held by or recorded in the name of other persons. 52 53

Sia vs. Court of Appeals, 222 SCRA 24 Sec. 55.1(b), RA 8791.

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8) In a case where the money deposited or invested is the subject matter of the litigation, could an inquiry into the whereabouts of the amount extend to the deposits held in the name of persons other that the one responsible? Even in cases not involving prosecution under Anti-Graft and Corrupt Practices Act, an inquiry into the whereabouts of the amount converted necessarily extends to whatever is concealed, held or recorded in the name of persons other than the one responsible inasmuch as the case is aimed at recovering the amount converted. 9) Are foreign currency deposits covered by the law? While the law does not cover foreign currency deposits, they however are absolutely confidential and cannot be disclosed pursuant to Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act, the only exception to disclosure being upon the written consent of the depositor54. An additional exemption has been provided by the Anti Money Laundering Law when it has been established that there is probable cause that the deposits involved 54

Sec. 8, RA 6426.

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are in any way related to the offense of money laundering.55

Trade Organization (Mirpuri vs. CA GR no 114508)

10) Will an unlawful examination of a bank account render the information obtained inadmissible?

COVERAGE -intellectual property

There is nothing in the law that provides that an unlawful examination shall render the evidence obtained therefrom to be inadmissible. 11) What is the penalty for a violation of the law? Upon conviction, a violator may be sentenced to imprisonment of not more than 5 years of a fine of not more than P200,000.00, or both at the discretion of the court. INTELLECTUAL PROPERTY CODE R.A. No. 8293 INTELLECTUAL PROPERTIES Those property rights which result from the physical manifestation of an original thought. (Ballantine’s Law Dictionary) Purpose: to strengthen the intellectual and industrial property system in the Philippines as mandated by the country’s accession to the Agreement establishing the World 55

rights consists of: a) Copyrights and related rights; b) Trademarks and service marks; c) Geographic indications; d) Industrial designs; e) Patents; f) Layout-designs (Topographies) of Integrated Circuits; and g) Protection of Undisclosed Information. Section 7 of Rep. Act No. 9502 (Universally Accessible Cheaper and Quality Medicines Act of 2008) amends Section 72 of the Intellectual Property Code in that the latter law unequivocally grants third persons the right to import drugs or medicines whose patent were registered in the Philippines by the owner of the product (Roma Drug vs. RTC of Guagaua, Pampanga GR No. 149907) INTERNATIONAL CONVENTION AND RECIPROCITY -any person who is a national or who is domiciled or has a real and effective industrial

Sec. 11, RA 9160

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establishment in a country which is: a.) a party to any convention, treaty, or agreement relating to intellectual property rights or the repression of unfair competition to which the Philippines is also a party, or b.) extends reciprocal rights to nationals of the Philippines by law, shall be entitled to benefits to the extent necessary to give effect to any provision of such convention, treaty, or reciprocal law, in addition to the rights to which any owner of an intellectual property right is otherwise provided by law. (Sec. 3)

c) Condemnation or seizure of products subject of the offense; d) Forfeiture of properties used in the commission of the offense; e) Imposition of administrative fines; f) Cancellation of permit, license, authority or registration; g) Withholding of permit, license, authority or registration; h) Assessment of damages; - Must be recovered within four (4) years from the time the cause of action arose (Sec. 226) i) Censure; j) Analogous penalties or sanctions (Sec. 10.2 [b])

REVERSE RECIPROCITY OF FOREIGN LAWS – makes reciprocally enforceable on nationals of a foreign state within Philippine jurisdiction all conditions, restrictions, limitations, diminutions, requirements or penalties that may be imposed by such foreign state on a Filipino national seeking intellectual property protection in that country. (Section 231)

ELEMENTS OF UNFAIR COMPETITION (1) confusing similarity in the general appearance of the goods; and (2) intent to deceive the public and defraud a competitor. The confusing similarity may or may not result from similarity in the marks, but may result from other external factors in the packaging or presentation of the goods. The intent to deceive and defraud may be inferred from the similarity of the appearance of the goods as offered for sale to the public. Actual fraudulent intent need not be shown (In-NOut Burger vs. Sehwani GR No. 179127)

ADMINISTRATIVE PENALTIES IMPOSED FOR VIOLATIONS OF LAWS INVOLVING IPR a) Cease and desist order (CDO); b) Acceptance of voluntary assurance compliance (VAC) or voluntary assurance of discontinuance (VAD); BAR OPERATIONS 2011

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PATENT – an exclusive right acquired over an invention, to sell, use, and make the same whether for commerce or industry(2005 2006 bar exams) PATENTABLE INVENTIONS -any technical solution of a problem in any field of human activity which is (a.)NEW(NOVELTY), involves an (b).INVENTIVE STEP and is (c).INDUSTRIALLY APPLICABLE shall be patentable. (Elidad Kho vs. CA, March 19, 2002) The patentable invention may be, or may relate to, a product, or process, or an improvement of any of the foregoing. (Sec. 21) Novelty – that which does not form part of a prior art. (Section 23) Prior Arts: a. those previously available to the public b. that which forms part of an application provided that: i. the inventors or applicants are not the same ii. The contents of the application are published in accordance with the requirements of patent application rules. iii. The filing date of the prior art is earlier. Inventiveness/Inventive Step -that which is not obvious to a person skilled in the art of the time of the filing date or priority BAR OPERATIONS 2011

date of the application claiming the invention. (Sec. 26) Industrial Applicability -an invention that can be produced and used in any industry. (Sec. 27) NON-PATENTABLE INVENTIONS a) Discoveries, Scientific Theories and Mathematical Methods; b) Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computer; c) Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body; d) Plant varieties or animal breeds of essentially biological process for the production of plants or animals; e) Aesthetic creations; f) Anything which is contrary to public order or morality (Sec. 22) RIGHT TO A PATENT The right to a patent belongs: a) to the inventor, his heirs, or assigns b) when 2 or more persons have made the invention jointly – to them jointly c) if two (2) or more persons have made the invention separately and Page 245

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independently of each other – to the person who filed an application for such invention (FIRST TO FILE RULE) d) where 2 or more applications are filed for the same invention – to the applicant who has the earliest filing date or the earliest priority date (FIRST TO FILE RULE) (Sec. 29) e) In case of inventions created pursuant to a commission – to the person who commissions the work UNLESS agreed otherwise. f) If made by an employee, the patent shall belong to:  the employee – if invention not part of his regular duties even if he uses the time, facilities and materials of the employer; OR  The employer – if the invention is the result of the performance of his regularly assigned duties unless agreed otherwise. Right to Priority -an application for patent filed by any person who has previously applied for the same invention in another country which by treaty, convention, or law affords similar privileges to Filipino citizens, shall be considered as filed as of the date of filing the foreign application Requisites: BAR OPERATIONS 2011

(a) The local application expressly claims priority; (b) It is filed within twelve (12) months from the date the earliest foreign application was filed; (c) A certified copy of the foreign application together with an English translation is filed within six (6) months from the date of filing in the Philippines. (Sec. 15, R.A. No. 165a) RIGHTS ACQUIRED BY THE PATENTEE a. to restrain, prohibit and prevent any unauthorized person or entity from making, using, offering for sale, selling or importing a patented product; b. to restrain, prevent or prohibit any unauthorized person or entity from using the process, and from manufacturing, dealing in, using or offering for sale, or importing any product obtained directly or indirectly from a patented process; c. to assign, or transfer by succession the patent, and to conclude licensing contracts for the same UNITY OF INVENTION -every application for patent registration must contain an application over a single invention or several inventions Page 246

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but must form part of a single general inventive concept Utility Models -models of implement or tools of any industrial product even if not possessed of the quality of invention but which is of “practical utility” Industrial Design -any composition of lines or colors or any three-dimensional form, whether or not associated with lines or colors provided that such composition or form gives a special appearance to and can serve as pattern for an industrial product or handicraft. CANCELLATION OF PATENTS 1. Who may file?  any person  IPO motu proprio 2. Grounds a) That the patent is invalid (Sec. 81); b) If the invention is not new or patentable; c) Unclear and incomplete application; d) Contrary to public order or morality. Failure to make payments of annual fees or dues 3. Where to file?  BLA – if in violation of IPC (administrative)  RTC – otherwise INFRINGEMENT BAR OPERATIONS 2011

-the making, using, offering for sale, selling or importing a patented product or a product obtained directly or indirectly from a patented process or the use of a patented process without the authorization of the patentee. (Sec. 76) Test of Patent Infringement 1) Literal Infringement – resort is had to the “words” of the claim. 2) Doctrine of Equivalents – if two devices do the same work in substantially the same way and produce substantially the same result, they are the same even though they differ in name, form, or shape. REMEDIES IN CASE OF INFRINGEMENT A) File civil case - with the appropriate Regional Trial Court to recover from infringer the damages sustained by the former, plus attorney’s fees and other litigation expenses, and to secure an injunction for the protection of his rights. B) File criminal case -within 3 years from date of commission of the crime for repetition of infringement, without prejudice to the right for damages. (Sec. 84) 1995 & 2004 BAR Page 247

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Q - X Corporation commissioned W to paint the Mayon Volcano on the lobby of the new building of X Corp. for a price of P1M. Who owns the painting? Who owns the copyright of the painting? A - X Corporation owns the painting but the copyright belongs to W unless there is a written stipulation to the contrary. (Sec.178.4)

Collective Mark – any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods and services of different enterprises which use the sign under the control of the registered owner of the collective mark (Sec. 121.2)

While the Rome Convention gives broadcasting organizations the right to authorize or prohibit the rebroadcasting of its broadcast, however, this protection does not extend to cable retransmission (ABS-CBN vs. PMSI GR Nos. 175769-70)

Trade Name – the person (whether natural or juridical) who does business and produces the goods or the services is designated by a trade name. -there is no need to register trade names in order to secure protection for them.

LAW ON TRADEMARKS

Trade Dress– involves the total image of a product, including such features as size, shape, color or color combinations, texture, and/or graphics.

Trademark – anything which is adopted and used to identify the source of origin of goods, and which is capable of distinguishing them from goods emanating from a competitor -any word, name symbol or devise adopted and used by a manufacturer or merchant to identify his goods and distinguish them from those manufactured and sold by other (Society des Products Nestle vs. CA April 4, 2001) Service Mark – distinguishes the services of an enterprise from the service of other enterprises. BAR OPERATIONS 2011

HOW MARKS ARE ACQUIRED -Under RA 8293, the rights in a mark shall be acquired through registration made validly in accordance with its provisions. (Sec. 122) -when a person has identified in the mind of the public the goods he manufactures or deals in his business or services from those of others, such a person has a property right in the goodwill of said goods or services which will be protected in the same manner Page 248

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as other property rights (Sec. 168.1) RIGHTS CONFERRED -to prevent all third parties not having the owner’s consent from using in the course of trade identical or similar signs or containers for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion. (Sec. 147) NON-REGISTRABLE TRADEMARKS, TRADE NAMES AND SERVICE MARK a) Immoral, deceptive or scandalous matter, or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute; b) The flag or coat of arms or other insignia of the Philippines or its political subdivisions, or of any foreign nation, or any simulation thereof; c) A name, portrait or signature identifying a particular living individual except by his written consent, or the name, signature, or portrait of a deceased President of the Philippines, during the life of his widow, if any, except by written consent of the window; BAR OPERATIONS 2011

d) Is identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in respect of: (i) The same goods or services, or (ii) Closely related goods or services, or (iii) If it nearly resembles such a mark as to be likely to deceive or cause confusion; e) Be identical with or confusingly similar to an internationally well-known mark, whether or not registered in the Philippines, provided that: i. If the internationally wellknown mark is not registered in the Philippines, the application for registration of the mark can be rejected only if the goods or services specified in the application are similar to those of the internationally well-known mark; ii. If the internationally wellknown mark is registered in the Philippines, the application for registration of the mark can be refused even if the goods or services specified in the application are not identical or similar to those of the internationally well-known mark. f) Is likely to mislead the public; Page 249

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g) Generic signs for goods or services; h) Customary in everyday language or in established trade practice; i) Designate the kind, quality, quantity, intended purpose, value, geographical origin, time or production of the goods or services; j) Shapes necessitated by technical factors; k) Color alone, unless defined by a given form; or l) Is contrary to public order or morality FILING DATE OF AN APPLICATION -The filing date of an application shall be the date on which the office received the following indications and elements in English or Filipino: a) An express or implicit indication that the registration of a mark is sought; b) Indications sufficient to contact the applicant or his representative, if any; c) A reproduction of the mark where registration is sought; and d) The list of the goods or services for which the registration is sought. (Sec. 127.1)  NO filing date shall be accorded until the required fee is paid (Sec. 127.2) BAR OPERATIONS 2011

CANCELLATION OF TRADEMARK OR TRADENAME 1. Who may file? - any person who believes that he is and will be damaged by the registration of a mark 2. Where to file? - BLA 3. Grounds: a) Mark becomes generic for goods for which it is registered; b) Abandonment of the mark; c) Registration obtained fraudulently or contrary to provisions of RA 8293; d) Mark used by, or with permission of, registrant; e) Non-use within the Philippines for 3 uninterrupted years or longer. -may be excused if caused by circumstances arising independently of the will of the trademark owner, such as military coup, or political changes that impede commerce DOCTRINE OF SECONDARY MEANING - When a mark has become distinctive of the applicant’s goods in commerce and, in the mind of the public, indicates a single source of consumers, it may be registered. Page 250

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WHAT CONSTITUTES AN INFRINGEMENT -Under RA 8293, any person shall, without the consent of the owner of the registered mark: 1) Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark or the same container or a dominant feature thereof in connection with the sale, offering for sale, distribution, advertising any goods or services including other preparatory steps necessary to carry out the sale of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive; or 2) Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature thereof and apply such reproduction, counterfeit, copy, or colorable imitation to labels, signs, prints, packages, wrappers, receptacles, or advertisements intended to be used in commerce upon or in connection with the sale, offering for sale, distribution, or advertising of goods or services on, or in connection with which such use is likely to cause confusion, or to cause BAR OPERATIONS 2011

mistake, or to deceive, shall be liable for infringement. (Sec. 155) TEST OF TRADEMARK INFRINGEMENT 1) Dominancy Test – consists in seeking out the main, essential or dominant features of a mark. 2) Holistic Test – takes stock of the other features of a mark, taking into consideration the entirety of the marks. DIFFERENTIATED FROM UNFAIR COMPETITION 1) Cause of action: in infringement, the cause of action is the unauthorized use of a registered trademark; in unfair competition, it is the passing off of one’s goods as those of another merchant. 2) Fraudulent intent is not necessary in infringement, but necessary in UC. 3) Registration of trademarks: in infringement, it is a prerequisite; in UC, it is not required. 4) Class of goods involved: in infringement, the goods must be of similar class; in UC, the goods need not be of the same class. Page 251

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 infringement is a form of unfair competition REMEDIES AVAILABLE IN CASE OF INFRINGEMENT OF A REGISTERED MARK a) Sue for damages (Sec. 156.1); b) Have the infringing goods impounded (Sec. 156.2); c) Ask for double damages (Sec. 156.3) d) Ask for injunction (156.4) e) Have the infringing goods disposed of outside the channels of commerce (Sec. 157.1) f) Have the infringing goods destroyed (Sec. 157.1) g) File criminal action (Sec. 170); h) Administrative Sanctions UNFAIR COMPETITION -any person who shall employ deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services for those of the one having established such goodwill, or who shall commit any acts calculated to produce said result, shall be guilty of unfair competition. How Committed a) Making one’s goods appear as the goods of another; b) Use of artifice or device to induce the false belief that BAR OPERATIONS 2011

one’s goods are another; c) False statements course of trade; or d) Any act contrary faith calculated to another’s goods

those of in

the

to good discredit

TEST OF UNFAIR COMPETITION -The test is whether certain goods have been clothed with an appearance likely to deceive the ordinary purchaser exercising ordinary care. REMEDIES IN CASE OF UNFAIR COMPETITION a.) Damages which may either be:  reasonable profit which would have been realized, or  actual profits collected by the defendant, or  a certain percentage over the gross sales of defendant in case of the measure of damages cannot be readily ascertained; b.) Damages may be doubled in cases where actual intent to mislead the public or to defraud the complaint is shown; c.) Impounding of sales invoices and other documents evidencing sales; d.) Injunction e.) Destruction of goods found to be infringing, and all paraphernalia.

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While the Constitution does not encourage the unlimited entry of foreign goods, services and investments into the country, it does not prohibit them either. In fact, it allows an exchange on the basis of equality and reciprocity, frowning only on foreign competition that is unfair. ………GATT itself has provided built-in protection from unfair foreign competition and trade practices including anti-dumping measures, countervailing measures and safeguards against import surges. Where local businesses are jeopardized by unfair foreign competition, the Philippines can avail of these measures. There is hardly therefore any basis for the statement that under the WTO, local industries and enterprises will all be wiped out and that Filipinos will be deprived of control of the economy (Tañada vs. Angara GR No. 118295) LAW ON COPYRIGHT COPYRIGHT – system of legal protection an author enjoys in the form of expression of ideas(2004,2006,2007,2009 bar exams)  Works are protected by the sole fact of their creation, irrespective of their mode or form of expression, as well as their content, quality or purpose (Sec. 172.2)  Protection extends only to the expression of the idea, not to BAR OPERATIONS 2011

the idea itself or to any procedure, system, method or operation, concept or principle, discovery or mere data.  The copyright is distinct from property in the material object subject to it.  Copyright, in the strict sense, is purely statutory right. Being mere statutory right, it is limited to what the statute confers. It may be obtained and enjoyed only with respect to the subjects and by the persons, and on terms and conditions specified in the statute. Accordingly, it can cover only works falling within the statutory enumeration or description (Pearl & Dean Vs Shoemart GR 148222 August 15, 2003). CREATION OF A WORK A copyright work is created when the two (2) requirements are met: 1) Originality – does not mean novelty or ingenuity, neither uniqueness nor creativity. It simply means that the work “owes its origin to the author” 2) Expression – there must be “fixation.” To be “fixed”, a work must be embodied in a medium sufficiently permanent or stable, to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration. Page 253

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-if it is not required that the medium be visible as long as there is a possibility of retrieval, then there is fixation -it is fixation that defines the time from when copyright subsists. Before fixation, there can be no infringement. WORKS PROTECTED BY COPYRIGHT A. Original Work - Literary and artistic works which include in particular: a) Books, pamphlets, articles and other writings b) Periodicals and newspapers c) Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not reduced in writing or other material form d) Letters e) Dramatic or dramaticomusical compositions; choreographic works or entertainment in dumb shows f) Musical compositions, with or without words g) Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; models or designs for works of art h) Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art. BAR OPERATIONS 2011

i) Illustrations, maps, plans, sketches, charts and threedimensional works relative to geography, topography, architecture or science j) Drawings or plastic works of a scientific or technical character k) Photographic works including works produced by a process analogous to photography; lantern slides l) Audiovisual works and cinematographic or any process for making audiovisual recordings m) Pictorial illustrations and advertisements n) Computer programs o) Other literary, scholarly, scientific and artistic works (Sec. 172) B. Derivative Works – a) Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary works b) Collections of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents. (Sec. 173) WORKS NOT PROTECTED 1) Any idea, procedure, system, method or operation, concept, principle, discovery or mere data as such, even if Page 254

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expressed, explained, illustrated, or embodied in a work; 2) News of the day and mere items of press information; 3) Any official text of a legislative, administrative or legal nature, as well as any official translation thereof. (Sec. 175) 4) Any work of the Government of the Philippines. (Sec. 176) -prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office, may, among other things, impose as a condition the payment of royalties 5) Pleadings; 6) Decisions of courts and tribunals. -this pertains to the “original decisions” not to the SCRA published in volumes since these are protected under derivative works. RIGHTS OF AN AUTHOR A. Economic Rights (Sec. 177) -exclusive right to carry out, authorize or prevent the following acts 1. Reproduction of the work or substantial portion of the work 2. Dramatization, translation, adaptation, abridgement, BAR OPERATIONS 2011

3.

4. 5. 6. 7.

arrangement or other transformation of the work; The first public distribution of the original and each copy of the work by sale or other forms of transfer of ownership; Rental of the original or a copy of an audiovisual or cinematographic work; Public display of the original or copy of the work; Public performance of the work; and Other communication to the public of the work

B. Moral Rights (Sec. 193) 1) Right to require that the authorship of the works be attributed to him,; 2) Right of alteration or nonpublication 3) Right to preservation of integrity to object to any distortion, mutilation or other modification of, or other derogatory action in relation to, his work which would be prejudicial to his honor or reputation; and 4) Right not to be identified with work of others or with distorted work. Term of moral right -lifetime of the author and 50 years after his death Waiver of moral right 1) by a written instrument (Sec. 195) 2) by contribution to a collective work unless Page 255

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expressly reserved (Sec. 196) PRINCIPLE OF AUTOMATIC PROTECTION Under the Berne Convention, the enjoyment and exercise of copyright, including moral rights, shall not be the subject of any formality. OWNERSHIP OF COPYRIGHT 1. Single creator –the author of the work, his heirs or assigns. 2. Joint creation –the coauthors jointly as co-owners. But if the work consists of identifiable parts, the author of each part owns the part that he has created. 3. Employee’s creation –the employee if the creation is not part of his regular duties even if he uses the time, facilities and materials of the employer; otherwise it belongs to the employer 4. Commissioned work –the person commissioning but the copyright remains with the creator unless there is a written stipulation to the contrary. 5. Cinematographic works – the producer has copyright for purposes of exhibition; for all other purposes, the producer, the author of the scenario, the composer, the film director, the author of the work are the creators. BAR OPERATIONS 2011

6. Anonymous and pseudonymous works – the publishers shall be deemed the representative of the author unless: a. the contrary appears b. the pseudonyms or adopted name leaves no doubt as to the author’s identity or c. If the author discloses his identity 7. Collective works – the contributor is deemed to have waived his right unless he expressly reserves it. (Sec. 196) Collective Work – a work created by two or more persons at the initiative and under the direction of another with the understanding that it will be disclosed by the latter under his own name and that the contributions of natural persons will not be identified. (Sec. 171.2) 8. In case of transfers, the transferee shall own one or more or all the economic rights transferred provided: a. The assignment, if inter vivos, be in writing b. The assignment be filed with the National Library upon payment of the prescribed fee. LIMITATIONS TO THE RIGHTS ON COPYRIGHT Page 256

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1) Private performance, private and personal use – applicable only “when a work has been lawfully made accessible to the public.” Personal Use -making a single reproduction, adaptation, arrangement or other transformation of another’s work exclusively for one’s own individual use Private Use -making a reproduction, adaptation or other transformation of it, in a single person as in the case of “personal use” but also for a common purpose by a specific circle of persons only. 2) Fair Use of a Copyrighted Work Fair Use - a privilege in persons other than the owner of the copyright to use the copyrighted material in a reasonable manner without its consent, notwithstanding the monopoly granted to the owner by the copyright. -the doctrine of fair use is meant to balance the monopolies enjoyed by the copyright owner with interests of the public and of society. CRITERIA TO DETERMINE WHETHER USE IS FAIR OR NOT a) Purpose and the character of the use b) Nature of the copyrighted work BAR OPERATIONS 2011

c) Amount and substantially of the portions used d) Effect of the use upon the potential market of the copyrighted work (Sec. 185) THE “FAIR-USES” OF PROTECTED MATERIAL ARE  Criticizing, commenting, and news reporting;  Using for instructional purposes including producing multiple copies of classroom use, for scholarship, research and similar purposes (Sec. 185) 3) Working of Architecture (Sec. 186) -include the right to control the erection of any building which reproduces the whole or a substantial part of the work either in its original or in any form recognizably derived from the original; Provided, that the copyright in any such work shall not include the right to control the reconstruction, or rehabilitation in the same style as the original of a building to which that copyright relates 4) Reproduction of Published Work -exclusively for research and private study.

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5)

Reprographic Reproduction by Libraries -any library or archive whose activities are not for profit may, without the authorization of the author of copyright owner, make a single copy of the work by reprographic reproduction.

6) Reproduction of Computer Programs -allowed on the ff. conditions: a) only one copy is made; b)lawful owner made the copy; c)purpose of which the reproduction is made is legal like:  use to which the program is made and for which it was purchased demand the reproduction of a copy; or  the reproduction of a copy is necessary to guarantee against loss or destruction (Sec. 189.1) 7) Importation for Personal Purposes Requisites: a) Copies of the work are not available in the Philippines and: i. not more than one copy at one time is imported for strict individual use; ii. importation is by authority and for the use of Philippine Government; or BAR OPERATIONS 2011

iii. religious, charitable, or educational society imported not more than 3 copies per title provided they are not for sale. b) Copies form part of libraries and personal baggage belonging to persons or families arriving from foreign countries and are not intended for sale: Provided, that such copies do not exceed three (3). (Sec. 190) REMEDIES IN CASE OF INFRINGEMENT 1) Injunction to prevent infringement 2) Damages assessed on the basis of the proof alleged by the plaintiff of sales made by the defendant of the infringing work minus whatever costs the defendant may be able to prove and appreciated by the court. 3) Delivery under oath of all implements employed in the production of the infringing products themselves and the infringing items, for impounding or destruction as the court may order. 4) Payment of moral and exemplary damages under the discretion of court. 5) Criminal Action If the containers originally conformed to the description Page 258

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contained in the certificate of registration and it appears that they are the same containers being used by the other persons, the use is illegal regardless of whether or not their distinctive name, mark or design is partly or entirely erased therefrom. (Destileria Ayala, Inc. vs. Tan Tay & Co. GR No. l-48793) A.M. No. 04-7-06-SC RE: CONDITIONS ON THE COMMERCIAL EXPLOITATION .OF SUPREME COURT DECISIONS RESOLUTION a. The person compiling and selling the decisions shall provide the Supreme Court Library twenty (20) free copies of the compiled decisions in the format the compilation is sold to the public; b. If the compilation is in printed copies, the Supreme Court Library shall have the right to digitize the compilation for exclusive use for research purposes by Justices, Judges and court attorneys of the Judiciary; c. If the compilation is in digitized format, the Supreme Court Library shall have the right to make available the digitized

compilation for exclusive use for research purposes by Justices, Judges and court attorneys of the Judiciary. The person compiling shall submit to the Supreme Court Library a text-file digitized copy of the compilation; d. The Court shall have the right to purchase copies of the compilation at cost, that is, by paying only the cost of reproducing the compilation, the cost of installation, and the cost of any accompanying software license. Such copies shall be used exclusively by Justices, Judges and court attorneys of the Judiciary and shall not be re-sold by the Court; e. The compilation shall bear the notice “Compiled for sale to the public with the permission of the Supreme Court”; f. These conditions apply to any updating of the compilation.

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THE BARRISTERS’ CLUB OFFICERS: BAR OPERATIONS 2011

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Virgel Amor Vallejos (Chancellor) Seychelles June M. Doringo (Secretary) Janilet Mishelle R. Carillo (Treasurer) Art Miguel B. Sanlao and Angelito Velasquez Jr. (Business Managers) Rachelle May Gallego (PRO) Paul Dean Mark Pila (SSG Representative) Brenda Filipinas Danganan (Ex-officio) Atty. Isagani Calderon (Adviser) Atty. Reynaldo U. Agranzamendez (Dean,College of Law)

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