CONSOLIDATED ZARAH NOTES.doc

Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro CORPORATION CODE (BP BLG 68)

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*Corporation Code is the general law on Private Corporation regarding to its creation, formation and powers.

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INTRODUCTION: A. Historical Background Effectivity: May 1, 1980 Article XII Section 16 of the 1987 Constitution: “The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.” *Congress has limited powers in the formation, creation and regulation of a private corporation. Purposes: 1. Uniformity 2. To avoid corruption General Rule: Congress is prohibited to enact a law directly forming a private corporation. Exception: GOCC may be created by special charter. *GOCC is a private corporation with regard to function and in the meantime a public corporation with regard to ownership. Twin Conditions must be present in forming a GOCC: 1. Interest in the common good 2. Subject to the test of economic viability - Means can survive alone in the market; can generate income which they can use for their operating expenses CONCEPT AND CORPORATION:

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A. Statutory definition of a Corporation Section 2 of the Corporation Code: “A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.” B. Attributes of a Corporation  Artificial Being

It exist by fiction of law only, hence it is subject to limitations that are inherent because of its nature A corporation is a juridical person which exists by process of legal fiction Doctrine of Corporate Entity/Doctrine of Separate Personality - A corporation is a legal or juridical person with a personality separate and apart from its individual stockholders or members and from any other legal entities to which it may be connected Consequences/Implications of Separate Personality: 1. It is entitled to own properties in its own name and its properties are not the properties of its stockholders, directors and officers. Cases: Magsaysay-Labrador v CA; Sulo ng Bayan v Araneta *The interest of the stockholders over the properties of the corporation is merely inchoate. *Merely inchoate because there are still condition precedents before the shareholders get their share, viz, in Asset, there are dissolution and satisfaction of claims; in profit-sharing, there are unrestricted retained earnings and declaration by the Board of Directors. 2. It can incur obligations and its obligations are not the obligations of its stockholders, directors and officers. Case: Francisco v CA 3. The rights belonging to the corporation cannot be invoked by the stockholders, directors and officers and vice versa. 4. Corporations are entitled to certain constitutional rights, i.e., right against unreasonable searches and seizure, due process clause. *It is not entitled to certain constitutional right, i.e., right against self-incrimination particularly production of corporate documents.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

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*Right against self-incrimination is applicable only to natural persons. General Rule: Constitutional guarantees are applicable to corporations. Exceptions: 1. Right against selfincrimination 2. Freedom to travel Case: Bataan Shipyard v PCGG It is liable for tort. It is liable when the act was committed by the officer or agent under express direction or authority from the stockholders or members acting as a body or generally from the directors as the governing body. Generally, the corporation is considered a national of the country where it was incorporated (Place of incorporation test) *Exceptions: 1. In times of war, the nationality of a corporation is determined by the nationality of the controlling stockholders; 2. Under the Foreign Investment Act of 1991 Corporations are incapable of intent, hence, they cannot commit felonies that are punishable under the RPC. They cannot commit crimes that are punishable under special laws because crimes are personal in nature requiring personal performance of overt acts. In addition, the penalty of imprisonment cannot be imposed. *Criminal liability falls upon to responsible officers. *Responsible officers cannot invoke the doctrine of separate personality. *Corporations cannot be incarcerated. Moral damages cannot be awarded in favor of corporations because they do not have feelings and mental state. *Corporations can claim damages such as actual,

compensatory, exemplary, loss of earning capacity. General Rule: Corporation cannot claim moral damages. Exception: If the corporation has a good reputation and such reputation was destroyed. Case: Coastal Pacific Trading v Southern Rolling Mills, Co. *In Filipinas Broadcasting Network Inc. v. Ago Medical and Educational Center, the SC ruled that a corporation can recover moral damages under Article 2219(7) if it was the victim of defamation. Doctrine of Piercing the Veil of Corporate Entity – The doctrine that a corporation is a legal entity distinct from the persons composing it. It is a theory introduced for the purposes of convenience and to serve the ends of justice. But when the veil of corporate fiction is used as a shield to perpetuate fraud, to defeat public convenience, justify wrong, or defend crime, this fiction shall be disregarded and the individuals composing it will be treated identically. Cases: Times Transportation Co. v Santos Sotelo; Concept Builders v NLRC *The doctrine of piercing the veil of corporate entity is the exception to the doctrine of corporate entity. *The users of this doctrine are: 1. Stockholder; 2. Group of stockholders; 3. Another corporation. Effects: 1. Stockholders, officers and corporation are in effect jointly liable; 2. In case of two corporations, they will be treated as one wherein they will be both solidarily liable. (Instrumentality rule) *There is no effect on the existence of each corporation as long as their separate entity is used for legitimate purposes. Instrumentality Rule – When one corporation is so organized and controlled and its affairs are conducted so that it is in fact a mere instrumentality or adjunct of the other, the fiction of the corporate entity to the instrumentality may be disregarded. *The user is another corporation. Keyword: CONTROL Requisites: 1. Control, not mere majority or complete stock control, but complete dominion, not only of finances but of policy and business in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro mind, will or existence of its own; 2. Such control must have been used by the defendant to commit fraud or wrong in contravention of plaintiff’s legal rights; 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. Three cases of piercing the veil: 1. Fraud Cases – when a corporation is used as a cloak to cover fraud, or to do wrong; 2. Alter Ego Cases – when the corporate entity is merely a farce since the corporation is an alter ego, business conduit or instrumentality of a person or another corporation; 3. Equity cases – when piercing the corporate fiction is necessary to achieve justice or equity. Probative Factors of Identity: 1. Identical shareholders; 2. Same set of officers, directors, or trustees; 3. Use of same premises, properties, tools and equipments; 4. Engage practically in the same business; 5. The same manner of keeping books and records. *The probative factors of identity are not conclusive but may be considered as strong evidence.  Creature of Law Article XII Section 16 of the 1987 Constitution: “The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.” Concession Theory – It is a principle in the creation of corporations, under which 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. The life of the corporation is a concession made by the State.  Right of Succession - Capacity to have continuity of existence despite the changes on the persons who compose it. Thus, the personality continues despite the change of stockholders, members, board members or officers; death or disability.

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Also known as Principle Perpetual Succession

Reason: To more stable 

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Creature of enumerated powers, attributes and properties Doctrine of Limited Capacity – No corporation under the Corporation Code, shall possess or exercise any corporate powers, except those conferred by law, its Articles of Incorporation, those implied from express powers and those as are necessary or incidental to the exercise of the powers so conferred. The corporation’s capacity is limited to such express, implied and incidental powers. *Corporation may be restrained from engaging a particular transaction because it is beyond their powers. *General Capacity – a corporation can perform any act for as long as it is lawful, moral and not contrary to public policy or order. Ultra Vires Doctrine – Even if the act is lawful, moral and not contrary to public order or policy but such act is not within the express, implied and incidental powers of the corporation such act shall be void for being ultra vires. *These doctrines are based on Section 2 and Section 45 of the Corporation Code.

C. Classification of Private Corporations: 1. As to existence of Stocks: Stock Corporation – Corporations which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. (Sec. 3) Non-stock Corporation – A corporation where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution. (Sec. 87) Q: Is it correct to say that a Non-stock corporation cannot generate income on their own? A: NO 2. As to function/organizers: Public Corporation – for public purpose and organized by the State.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Private Corporation – for profit making functions and organized by private persons alone or with the State 3. As to laws of Incorporation (Place of Incorporation) : Domestic Corporation – corporation formed, organized or existing under the Philippine Laws. Foreign Corporation – corporation formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. (Sec. 123) *License is necessary for; 1. Regulation purposes and 2. Access to local courts. 4. As to legal status: De Jure Corporation – corporation created in strict or substantial compliance with the mandatory requirements for incorporation and the right of which to exist as a corporation cannot be successfully attacked or questioned by any party even in a direct proceeding for that purpose by the state. De Facto Corporation – the due incorporation of any corporation claiming in good faith to be a corporation under the Corporation Code, and its right to exercise corporate powers, shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by Solicitor General in a quo warranto proceeding. (Sec. 20) - organized with a colourable compliance with the requirements of a valid law and its existence cannot be inquired collaterally. - There is an irregularity or defect in the constitution or organization. Can be compared to a voidable contract, i.e., valid until annulled. *Can be challenged by the State later on. Cases: Hall v Piccio; Seventh Adventist v Northeastern Mindanao Mission *The filing of the Articles of Incorporation and the issuance of the certificate of registration are the essential requisites for the existence of a de facto corporation. Requisites: 1. The existence of a valid law under which it may be incorporated;

2. An attempt in good faith to incorporate; 3. Use of corporate powers; 4. Filing of the Articles of Incorporation; 5. Subsequent compliance with the requirement of law. *In both corporations, there must be a certificate of registration issued. Doctrine of Corporation by Estoppel – All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as an result thereof: Provided, however, that when any such ostensible corporation is sued on any transaction entered into by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack or corporate personality. (Sec. 21) - Group of persons which holds itself out as a corporation and enters into a contract with a third person on the strength of such appearance cannot be permitted to deny its existence in an action under said contract. Case: Lim Tong Lim v CA *Lim is stopped because he benefited from the transaction. Remedy: To ran after those persons responsible for the representations Essence: They are precluded from denying their existence by their previous act or conduct 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. Affiliate – one related to another by owning or being owned by common management or by a long-term lease of its properties or other control device. It may be the controlled or controlling corporation, or under common control. Subsidiary Corporation – one which is so related to another corporation that the majority of its directors can be elected either directly or indirectly by such other corporation. It is always controlled. Open Corporation – one which is open to any person who may wish to become a stockholder or member thereto.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Close Corporation – those whose shares of stock are held by limited number of persons like the family or other closely knit group. (Sec. 96) FORMATION AND ORGANIZATION PRIVATE CORPORATION:

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A. Submission of Articles of Incorporation; contractual significance *The life of a corporation commences from the issuance of the Certificate of Registration by the SEC upon filing of the Articles of Incorporation and other documents. Article of Incorporation – is the charter of the corporation, and the contractual relationships between the State and the corporation, the stockholder and the State, and between the corporation and its stockholders. Contractual Significance: 1. The issuance of a certificate of incorporation signals the birth of the corporation’s juridical personality; 2. It is an essential requirement for the existence of a corporation, even a de facto one. B. Contents and Form of the Articles of Incorporation (Secs. 14 and 15) Contents of Articles of Incorporation: 1. Corporate Name; 2. Purpose Clause; 3. Principal office; 4. Term of existence; 5. Incorporators; 6. Directors or trustees; 7. Capitalization; 8. Shares of stock; 9. Treasurer’s Affidavit. 

Corporate Name Purpose: Identification *Corporation can not adopt any name or group of words at its pleasure because of statutory limitation, viz., Sec. 18 of the Corporation Code which provides that: “No corporate name may be allowed by the SEC if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended

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certificate of incorporation under the amended name. SEC Guideline ”x x x b. In order to prevent confusion and difficulties of administration, supervision and control, if the proposed name contains a word already use as a part of the firm name or style of a registered entity, the proposed name must contain two other words different and distinct from the name of the company already registered or protected by law. x x x” Case: Ang Mga Kaanib Ni Jesus Cristo *The phrase “Ang Mga Kaanib” are words merely descriptive of membership while the phrase “Sa Bansang Pilipinas” are merely descriptive of the place. *Both parties are religious institutions *Both use the acronym H.S.K. As a rule, generic name or descriptive word may be used as a corporate name. Reason: public domain; can be used by anyone; public use. Exception: Doctrine of Secondary Meaning – a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product. Requisites: 1. Period of use; 2. The use must be exclusive. Case: Lyceum of the Philippines *The exclusivity requirement was not satisfied by Lyceum of the Philippines. *In case of change of name, the corporation is not dissolve nor create a new corporation; it also does not extinguish the corporate liability. *Change of name can be done by amending the Articles of Incorporation. Procedure: 1. Obtain approval of majority of the Board and 2/3 stockholders; 2. Submission to the SEC for approval. Purpose Clause *Only one primary purpose. Primary purpose defines the business activities

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

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of the corporation. It is the ordinary course of business of the corporation. *Secondary Purpose is for future expansion. There is no limit on the secondary purpose. *In case the primary purpose is not viable then secondary purpose may be used. Principal Office *The principal place of business may determine the venue of court cases involving corporations. It may also determine if service of summons and notices was properly made. It is also important for tax purposes (local taxation). *The SEC requires the exact address to be indicated in the Articles of Incorporation. *It is the residence of the corporation. It is where the corporation maintains its books and records and where normally the bulk of its business is being conducted or undertaken. *For personal action, venue is the residence. Term of Existence *A corporation has a maximum term of 50 years. It may be extended for a period not exceeding 50 years in any single instance. As a rule, no extension can be made earlier than 5 years prior to the expiration of the term. *No limitations regarding number of extension can apply. Reason: To compel the stockholders to meet the corporation’s term. Exception: If for compelling reasons, earlier extension will be allowed. *During the three year winding up period, the corporation still has personality but activities are limited to the liquidation of the corporation affairs and not to transact further business. As a rule, after the term has expired, no more extensions be allowed or entertained by the SEC. Reason: No more period to extend. Exception: Doctrine of Relation – The filing and recording of a certificate of extension after the term cannot relate back to the date of the passage of the resolution of the stockholders to extend the life of the corporation. However, the doctrine of relations applies if the failure to file the

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application for existence within the term of the corporation is due to neglect of the officer with whom the certificate is required to be filed or to wrongful refusal on is part to receive it. *The delay in submitting the application for extension is justifiable. Keywords: 1. Excusable delay; 2. Beyond the control of the corporation (insuperable intervening causes) Incorporators *Once an incorporator always an incorporator. (Fait accompli – an accomplished fact which cannot be altered) *They are the signatories to the Articles of Incorporation. *They are originally forming the corporation Q: What is the reason behind the phrase that an incorporator is not always a corporator? A: To be an incorporator it is not necessary to own a share unlike as a corporator. *Number is limited to 5 to 15. *They must have a contractual capacity. *Juridical person cannot create another juridical person. *There is no citizen requirement but special laws may require otherwise. *Majority must be a resident of the Philippines. Directors and trustees *The Board of Directors is the governing body in a stock corporation while Board of Trustees is the governing body in a non-stock corporation. *They exercise the powers of the corporation. Qualifications: 1. Every director must own at least one (1) share of the capital stock; 2. Majority of the directors or trustees must be residents of the Philippines. *Any director who ceases to be the owner of at least one share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. *Trustees of non-stock corporations must be members thereof. *Initial directors/trustees shall hold office for one year until their successors are elected and qualified.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 

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Capitalization Section 14(8) states that: “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.” *It is required that at least 25% of the subscribed capital must be paid and in no case may be paid-up capital be less than P5,000. Authorized Capital Stock – the amount fixed in the articles of incorporation to be subscribed and paid by the stockholders of the corporation. *Shows the total number of shares Subscribed Capital – that portion of the authorized capital stock that is covered by subscription agreements whether fully paid or not. Paid-Up Capital – the portion of the authorized capital stock which has been subscribed and actually paid. Outstanding Capital Stock – the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid except treasury shares so long as there is a binding subscription agreement. Shares of stock Q: Why shares of stock? A: Because there is a share on the capitalization. Economic Value: 1. expectancy on the share in the profits 2. expectancy on the share of assets in case of dissolution/liquidation. Political Value: 1. vote 2. control in the management of the corporation. Doctrine of Equality of Shares – “Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.” - Provides that where the Article of Incorporation do not provide for any

distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities. Classes of Shares: 1. Par Value Share – shares that have a nominal value in the certificate of stock. Contractual Significance: The minimum price at which the shares are to be issued. *The price is fixed. It is stated in the Articles of Incorporation. 2. No Par Value Share – those shares which do not have nominal value. However, they have issued value stated in the certificate or articles of incorporation. *There is flexibility in the price. *The price is determined by the Board. Limitations: 1. No par value shares cannot have an issued price of less than P5.00; 2. The entire consideration for its issuance constitutes capital so that no part of it should be distributed as dividends; 3. They cannot be used as preferred stocks; 4. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan association (Reason: imbued with public interest); 5. The articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares; 6. Once issued, they are deemed fully paid and non-assessable. 3. Voting Shares – shares with the right to vote. They have the right to participate in the management of the corporation through the exercise of such right. 4. Non-voting Shares – shares without the right to vote. *Has only a limited right to vote. General Rule: Shareholder owning non-voting shares has no right to vote. Exceptions: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of bylaws;

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with the Corporation Code; 8. Dissolution of the corporation. *The exceptions are exclusive; the list is a closed list Statutory Constraint: Sec. 6 of the Corporation Code *The corporation cannot provide for shares with no voting right General Rule: Only redeemable and preferred shares are deprived of voting right. Exception: Common shares may be denied of its voting right in the following instances: 1. Delinquent in paying the subscription; 2. If there was a founder’s share where it was given the right to vote exclusively for 5 years (Sec. 7). 5. Common Shares – the most common type of shares which enjoy no preference. *The basic class of stock ordinarily and usually issued without extraordinary rights and privileges, and the owners thereof are entitled 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. 6. Preferred Shares- shares which enjoy preference as to dividends or assets upon dissolution as stated in the Articles of Incorporation. Reason: To attract investors. *Preference does not give them a lien upon the property nor make them creditors of the corporation. *Characterized as redeemable shares. Kinds: 1. Preferred shares as to assets – share which gives the holder thereof preference in the

distribution of the assets of the corporation in case of liquidation; 2. Preferred shares as to dividends – share which gives the holder thereof preference in the distribution of the dividends to the extent agreed upon before any dividends at all are paid to the holders of common shares; 3. Participating preferred shares – the holders thereof are still given the right to participate with the common stockholders in dividends beyond their stated preference; 4. Non-participating preferred shares – where there is no such participation; 5. Cumulative preferred shares – the shareholder is entitled to recover dividends in arrears. While dividend declaration may not be compelled, once it is declared, the shareholder is entitled to the said arrears; 6. Non-cumulative preferred shares – not entitled to arrears only to present dividends. 7. Redeemable Shares – are those which permit the issuing corporation to redeem or purchase its own shares. Limitations: 1. Redeemable shares may be issued only when expressly provided for in the Articles of Incorporation; 2. The terms and conditions affecting said shares must be stated both in the certificate of stock representing such share; 3. Redeemable shares may be deprived of voting rights in the Articles of Incorporation, unless otherwise provided in the Corporation Code; 4. The corporation is required to maintain a sinking fund to answer for redemption price if the corporation is required to redeem; 5. The redeemable shares are deemed retired upon redemption unless otherwise provided in the Articles of Incorporation; 6. Unrestricted retained earnings is not necessary before shares can be redeemed but there must be sufficient assets to pay the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

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creditors and to answer for operations. 8. Treasury Shares – shares which have been earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation, redemption or through some lawful means. - Shares which are previously issued by the corporation but subsequently reacquired by the corporation. *Retired thus can no longer be reissued. *They are not entitled to dividends. *They are not entitled to voting rights. Rationale: to prevent abuse by the management. *These shares may again be disposed of for a reasonable price fixed by the Board of Directors. 9. Founders’ Shares – classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for the limited period not to exceed 5 years subject to the approval of the SEC. The 5 year period shall commence from the date of the approval by the SEC. Treasurer’s affidavit *The SEC shall not accept the Articles of Incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least 25% of the authorized capital stock of the corporation has been subscribed, and at least 25% of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least 25% of the said subscription, such paid up capital being not less than P5,000. *If the Treasurer’s affidavit is false such act is tantamount to fraud. (PD 902-A) *Fraud on the part of the corporation is a ground for revocation or suspension of license depending upon the extent of the violation committed. *If there’s no Treasurer’s Affidavit, the first ground shall apply, i. e.,

noncompliance with the minimum requirement. General Rule: 25% must be subscribed and 25% must be paid. Exception: If the law provides otherwise, i.e., special laws. C. Grounds for rejection of the Articles of Incorporation 1. The articles of incorporation or any amendment thereto is not substantially in accordance with the form prescribed herein; 2. The purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; 3. The Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is false; 4. 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. Dual Franchise Requirement: No articles of incorporation or amendment to articles of incorporation of banks, banking and quasi-banking institutions, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws shall be accepted or approved by the Commission unless accompanied by a favourable recommendation of the appropriate government agency to the effect that such articles or amendment is in accordance with law. D. Commencement of Corporate Existence Sec. 19 of the Corporation Code states that “ A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the SEC issues a certificate of incorporation under its official seal; and thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro period is extended or the corporation is sooner dissolved in accordance with law.” *For purposes of determining whether a corporation enjoys the status of a de facto corporation, it must have been at least issued a certificate of registration. E. Amendment of the Articles of Incorporation Sec. 16 of the Corporation Code states that: “Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least 2/3 of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least 2/3 of the members if it be a non-stock corporation.” *It is effective upon the approval of the SEC. *There may be an amendment by inaction. Amendment by Inaction – Upon filing with the SEC of the amendment and the Commission failed to act on it within 6 months from the date of filing for a cause not attributable to the corporation. F.

Effects of Non-Use of Corporate Charter Sec. 22 of the Corporation Code states that: “If a corporation does not formally organize and commence the transaction of its business or the construction of its work within 2 years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. However, 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 the suspension or revocation of its corporate franchise or certificate of incorporation. This provision shall not apply if the failure to organize, commence the transaction of its businesses or the construction of its works, or to continuously operate is due to causes beyond the control of the corporation as may be determined by the SEC.” *The period must be counted from the issuance of the Certificate of Incorporation.

*Automatic dissolution is not contemplated under Section 22. (SEC Opinion). *Section 22 must be read in conjunction with Sec 6(1) of PD 902-A which requires that the corporation must be given the opportunity to be heard in compliance with the requirement of due process before the revocation of its license. CONTROL AND CORPORATION:

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A. Levels of Corporate Control 1. By Stockholders/Shareholders; 2. By Corporate Officers; 3. By Directors/Trustees B. Board of Directors/Trustees  General Powers of the Board Sec. 23 of the Corporation Code states that: “Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one year until their successors are elected and qualified.” Powers of the Board of Directors: 1. Corporate Powers; 2. Manage the Corporation; and 3. Control over and hold the properties of the Corporation. *Board of Directors/Trustees is the statutory representative of the corporation. General Rule: All corporate powers emanate from the Board of Directors/Trustees. Exception: Unless otherwise provided in this Code. (Limiting Clause) The limiting clause means that there are certain corporate matters that cannot be done by the Board by reason that such matters fall upon the shareholders; or corporate matters that cannot be resolved by the Board alone, i.e., it must be done with the approval of the shareholders.  Business Judgment Rule Business Judgment Rule – questions of policy or management are left solely

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

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to the honest decision of officers and directors of a corporation and the courts are without authority to substitute their judgment for the judgment of the board of directors; the board is the business manager of the corporation and so long as it acts in good faith its orders are not reviewable by the courts or the SEC. - A resolution or transaction pursued within the corporate powers and business operations of the corporation, and passed in good faith by the board of directors/trustee, is valid and binding, and generally the courts have no authority to review the same and substitute their own judgment, even when the exercise of such power may cause losses to the corporation or decrease the profits of a department. *Great respect is accorded to the decisions of the Board of Directors/Trustees. *The directors are not liable to the stockholders in performing such acts. Qualifications of the Board Members Sec. 23 of the Corporation Code states that: “Every director must have at least one share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one share of the capital stock of the corporation of which he is a director shall thereby cease to be a director. Trustees of nonstock corporations must be members thereof. A majority of the directors or trustees of all corporations organized under this Code must be residents of the Philippines.” *In order to be eligible as director, what is material is the legal title to and not beneficial title or ownership of the stocks appearing on the books of the corporation. *The directors/trustees must be natural persons. *They must also be of legal age. *He must possess other qualifications as may be prescribed in the by-laws of the corporation. *Under Sec. 27 of the Corporation Code: “No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years, or a violation of this Code

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committed within 5 years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.” Reason: The position is based on trust and confidence. *No citizenship requirement. *The By-Laws may provide additional qualifications/disqualifications. Election of the Board Members Sec. 24 of the Corporation Code provides that: “At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. The election must be by ballot if requested by any voting stockholder or member. In stock corporations, every stockholder entitled to vote shall have the right to vote in person or by proxy the number of shares of stock standing, at the time fixed in the bylaws, in his own name on the stock books of the corporation, or where the by-laws are silent at the time of the election; and said stockholder may vote such number of shares for as many persons as there are directors to be elected or he may cumulate said shares and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal, or he may distribute them on the same principle among as many candidates as he shall see fit: Provided, that the total number of votes cast by him shall not exceed the number of shares owned by him as shown in the books of the corporation multiplied by the whole number of directors to be elected: Provided, however, that no delinquent stock shall be voted. Unless otherwise provided in the articles of incorporation or in the by-laws, members of the corporations which have no capital stock may cast as many votes as there are trustees to be elected but may not cast more than one vote for one candidate. Candidates receiving the highest number of votes shall be declared elected. Any meeting of the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro stockholders or members called for an election may adjourn from day to day or from time to time but not sine die or indefinitely if, for any reason, no election is held, or if there not present or represented by proxy, at the meeting, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the member entitled to vote.” *It is the stockholders or corporators who elect members of the Board of Directors. *The only procedure required by the Code is through Election. There can be no other modes. *The election must be by ballot if requested by any voting member or stockholder. *A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to use any of the methods of voting in the election of directors. *No delinquent stock shall be voted. *It is not required that the candidate received the majority vote, what the law provides is only plurality of votes. *Majority number is required only for the existence of a quorum. Not included in outstanding capital stocks: 1. Unissued stocks; 2. Non-voting stocks; 3. Treasury Shares. Methods of Voting: 1. Straight Voting – every stockholder may vote such number of shares for as many persons as there are directors to be elected. 2. Cumulative Voting for One Candidate – a stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. *Example: X has 10 shares in his name; there are 5 numbers of directors to be elected. X has 50 votes (10x5) available to him. X may opt to concentrate all his 50 votes to a particular candidate. 3. Cumulative Voting by Distribution – a stockholder may cumulate his shares by multiplying also the number of his shares by the number of directors to be elected and

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distribute the same among as many candidates as he shall see fit. *Example: X has 10 shares in his name; there are 5 numbers of directors to be elected. X has 50 votes available to him. X may opt to distribute the votes to as many candidates as there are provided that the total number of votes does not exceed 50. Purpose of cumulative voting: To protect the minority stockholders. *The elected officer must act as a body. *In a stock corporation, cumulative voting is a statutory right whereas in a non-stock corporation, cumulative voting is applicable if it is provided in the Article of Incorporation. Sec. 26 of the Corporation Code provides that: Within 30 days after the election of the directors, trustees and officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the SEC, the names, nationalities and residences of the directors, trustees and officers elected. Should a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately report such fact to the SEC.” Term of Office *The directors or trustees shall hold office for one (1) year subject to the “hold over” principle, i.e., they continue in office until their successors are elected and qualified. *The one year period does not apply to directors initially elected for purposes of incorporation. Quorum Requirement in Board Meetings Sec. 25 of the Corporation Code states that: “Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act,

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except for the election of officers which shall require the vote of a majority of all the members of the board.” Q: Is the director allowed to let a proxy attend a board meeting in behalf for himself? A: NO. Proxy prohibition. Reason: Because of their personal qualifications. *Quorum requirement should always be computed based on the number specified in the Articles of Incorporation regardless of ensuing vacancies. *The basis is always the number specified in the Articles of Incorporation. *The corporation can modify the number by providing a different provision in the articles of incorporation, however, the law provides that the modification must be for a number greater than that provided in the law. It cannot provide for a number less than the general requirement of the code. *For voting purposes, majority of the member present constituting a quorum. Except: election of directors. Removal of Board Members Sec. 28 of the Corporation Code states that: “Any director or trustee of a corporation may be removed from office by a vote of the stockholders holding or representing at least 2/3 of the outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least 2/3 of the members entitled to vote: Provided, that such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a

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non-stock corporation, on the written demand of a majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal may be with or without cause: Provided, that removal without cause may not be used to deprive minority stockholders or members of the right of representation to which they may be entitled under Sec. 24 of this Code.” Requisites: 1. It must take place either at a regular meeting or special meeting of the stockholders or members called for the purpose; 2. There must be previous notice to the stockholders or member of the intention to remove; 3. The removal must be by a vote of the stockholders representing 2/3 outstanding capital stock or 2/3 of members; 4. The director may be removed with or without cause unless he was elected by the minority, in which case, it is required that there is cause for removal. Reason: The functions of directors are fiduciary in nature. Requisites for the removal of minority directors are: 1. Justifiable cause; 2. Satisfaction of the voting requirements, i.e., 2/3 of OCS or members. *It is the secretary of the corporation upon order of the president or in case there is no secretary, stockholder representing majority of the outstanding capital stocks or member signing the demand who may call a meeting for the purpose of removal. Vacancies in the Board Sec. 29 of the Corporation Code provides that: “Any vacancy occurring in the board of directors or trustees

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other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only or the unexpired term of his predecessor in office. A directorship or trusteeship to be filled by reason of an increase in the number of directors or trustees shall be filled only by an election at a regular or at a special meeting of stockholders or members duly called for the purpose, or in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the meeting.” General Rule: Power to elect directors is vested in the stockholders Exception: Vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term may be filled by the vote of at least a majority of the remaining directors or trustees if still constituting a quorum. Compensation of Board Members Sec. 30 of the Corporation Code provides that: “In the absence of any provision in the by-laws fixing their compensation, the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, that any such compensation other than per diems may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders’ meeting. In no case shall the total yearly compensation of directors, as such directors, exceed 10% of the net income before income tax of the corporation during the preceding year.” General Rule: Directors are not entitled to receive compensation Exceptions: 1. When their compensation is fixed in the by-laws;

2. If compensation is granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders’ meeting. Limitation: In no case shall the total yearly compensation of directors exceed 10% of the net income before income tax of the corporation during the preceding year. Reason: In order to avoid temptation on the part of directors to abuse powers by appropriating compensation packages since they are in control of corporate assets. C. Corporate Officers  Concept of Corporate Officers *Corporate powers reside on the Board of Directors; decision/policymaking resides on them. Implementation of rules/policy lies on the corporate officers Categories: 1. Statutory Corporate Officers – President (must be a stockholder); Secretary (must be a resident and citizen of the Philippines); Treasurer (must be a resident and citizen of the Philippines). 2. As provided by the By-Laws – must be clearly stated in the By-Laws that such office is a corporate office. 3. Those designated by the Board of Directors provided the Board of Directors is authorized to do so by the By-Laws.  Validity and Binding Effect of Acts of Corporate Officers General Rule: No one, even corporate officers can bind the corporation. It is only the Board of Directors who has the authority to bind the corporation. Exceptions: 1. If the By-Laws provides that such act is part of the function of such office; 2. If authorized by the Board of Directors  Doctrine of Apparent Authority Doctrine of Apparent Authority/Doctrine of Estoppel –If a corporation, knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro against anyone who has in good faith dealt with it through such agent, be stopped from denying the agent’s authority. Cases: People’s Aircargo; InterAsia; Lapu-Lapu *Requires good faith on the part of third person. D. Liability of Directors, Trustees and Officers  Instances when Corporate Officers/Directors are held Solidarily Liable Sec. 31 of the Corporation Code provides that: “Directors or trustees who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation.” General Rule: Directors/Trustees/Officers are not solidarily liable with the corporation. Exceptions: 1. Wilfully and knowingly vote for and assent to patently unlawful acts of the corporation (Sec. 31). Case: Carag v NLRC 2. Guilty of gross negligence or bad faith in directing the affairs of the corporation (Sec. 31). Case: David v Construction Industry 3. Acquire any personal or pecuniary interest in conflict of their duty (Sec.31). 4. Consent to the issuance of watered stocks or having knowledge thereof, fails to file

objections with the secretary (Sec. 65). 5. Agree or stipulate in a contract to hold himself personally liable with the corporation. 6. By virtue of a specific provision of law such as BP 22; Trust receipts Law; RA 7832 (AntiElectricity Pilferage Act of 1997); Securities Regulation Code *In Carag v NLRC, the Supreme Court held that not any violative of law, the Code means that violation must have a corresponding penalty. Patently unlawful act means that a law declares an act unlawful and that such law provides penalty for that unlawful act. 

Self-Dealing Directors/Officers Sec. 32 of the Corporation Code states that: “A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of such corporation, unless all of the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. That the vote of such director or trustee was not necessary for the approval of the contract; 3. That the contract is fair and reasonable under the circumstances; and 4. That in case of an officer, the contract has been previously authorized by the board of directors. Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a director or trustee, such contract may be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or of at least 2/3 of the members in a meeting called for the purpose: Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting: Provided, however, that the contract is fair and reasonable under the circumstances.” Example:

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro In XYZ Corporation, A is a director. The corporation acts through the Board of Directors. XYZ Corporation and A entered into a lease contract. A as the lessor and XYZ Corporation as lessee. The contract was approved by the Board of Directors. Q: What is the status of the contract? General Rule: The contract is voidable. Exception: If the requisites provided in Sec. 32 are present. Exception to the Exception: If requirement number 1 or 2 is absent, in the case of a contract with a director or trustee, such contract may be considered valid by the ratification of at least 2/3 of the outstanding capital stock or 2/3 of the members. Requisites: 1. The presence of such director or trustee in the board meeting in which the contract was approved was not necessary to constitute a quorum for such meeting; 2. The vote of such director or trustee was not necessary for the approval of the contract; 3. The contract is fair and reasonable under the circumstances; 4. In case of an officer, the contract has been previously authorized by the board of directors. Reason: A’s presence in the board meeting might affect the status of the contract.

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Self-Dealing Directors/Officers – directors/officers who transact business with their own corporation. - This is not prohibited by law. Interlocking Directors – those who have been elected as directors in 2 or more different corporations. - May be prohibited by the By-Laws (Gokongwei case). -Not prohibited by law however there are consequences. Contracts involving Inter-locking Directors Sec. 33 of the Corporation Code provides that: “Except in cases of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone: Provided, That if the interest of the

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interlocking director in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of the preceding section insofar as the latter corporation or corporations are concerned. Stockholdings exceeding 20% of the outstanding capital stock shall be considered substantial for purposes of interlocking directors.” Example: A is a director of two corporation, ABC Corporation and XYZ Corporation. XYZ Corporation and ABC Corporation entered into a lease contract where ABC Corporation is the lessor and XYZ Corporation is the lessee. Q: Can this contract be invalidated on the ground that there is an interlocking director? A: NO. Q: What is the status of the contract? A: General Rule: Contracts between two or more corporations having interlocking directors are valid. Exceptions: 1. Contracts are void if contracts are fraudulent or if contracts are unfair and unreasonable. 2. If the By-Laws prohibits interlocking director. Case: Gokongwei, Jr. v SEC *The interest is nominal if his interest is 20% or less of the outstanding capital stock. The interest is substantial if his interest is more than 20% of the outstanding capital stock. *If the interlocking director has a substantial interest in one corporation and has a nominal interest in the other corporation, the director must comply with the requisites provided in Sec. 32 on self-dealing directors. Reason: The case is analogous to that of transactions involving self-dealing directors because such director holds substantial interest with the other company. Doctrine of Corporate Opportunity Sec. 34 of the Corporation Code states that: “Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro refunding the same, unless his act has been ratified by a vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock. This provision shall be applicable notwithstanding the fact that the director risked his own funds in the venture.” General Rule: A director shall refund to the corporation all the profits he realizes on a business opportunity which: 1. the corporation is financially able to undertake; 2. from its nature, is in line with corporations business and is of practical advantage to it; and 3. the corporation has an interest or a reasonable expectancy. Exception: His act has been ratified by a vote of the stockholders owning or representing at least 2/3 of the outstanding capital stock. *A business opportunity ceases to be corporate opportunity and transforms to personal opportunity where the corporation refuses or is definitely no longer able to avail itself of the opportunity. E. Executive Committee Sec. 35 of the Corporation Code states that: “The by-laws of a corporation may create an executive committee composed of not less than 3 members of the board to be appointed by the board. Said committee may act, by majority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in the by-laws or on a majority vote of the board, except with respect to: (1) approval of any action for which shareholders’ approval is also required; (2) the filing of vacancies in the board; (3) the amendment or repeal of bylaws or the adoption of new by-laws; (4) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; and (5) a distribution of cash dividends to the shareholders.” Keyword: BY-LAWS *It must be stated in the By-Laws. *Board Resolution is not sufficient if there is no provision in the By-Laws. *The decision of the executive committee is considered a Board Resolution. *The decision of the executive committee is not subject to appeal to the board. However, if the resolution of the Executive

Committee is invalid it may be ratified by the Board. *The decision of the executive committee needs no confirmation from the Board. Case: Filipinas Port, Inc. *The corporation may create other committees. Distinction: In executive committee, there is a statutory restriction on members whereas in other committee there is no such restriction. General Rule: The executive committee may act on specific matters within the competence of the board as may be delegated to it in the by-laws or on a majority vote of the board. Exceptions: 1. Approval of any action for which shareholders’ approval is also required; 2. The filing of vacancies in the board; 3. The amendment or repeal of by-laws or the adoption of new by-laws; 4. The amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; 5. A distribution of cash dividends to the shareholders. CORPORATE POWERS: A. Doctrine of Limited Capacity; Concept of Ultra Vires Act Sec. 45 of the Corporation Code states that: “No corporation under this Code shall possess or exercise any corporate powers except those conferred by this Code or by its articles of incorporation and except such as are necessary or incidental to the exercise of powers so conferred.” Ultra Vires Acts – an act committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law. Effects of Ultra Vires Acts: 1. Executed Contract – courts will not set aside or interfere with such contracts. 2. Executory Contract – no enforcement even at the suit of either party. 3. Partly executed and Partly executory contract – principle against unjust enrichment shall apply. B. Classes of Corporate Powers 1. Express 2. Implied 3. Incidental

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Express – those expressly authorized by the Corporation Code and other laws, and its Articles of Incorporation or Charter. Implied – those that can be inferred from or necessary for the exercise of the express powers. Incidental – those that are incidental to the existence of the corporation.

Doctrine of Necessary Implication – those which can be reasonably inferred from the express powers given since they are necessary for the corporation to perform a particular act are deemed part of such powers. C. Statutory Powers of a Corporation and the Limitations on their Exercise Sec. 36 of the Corporation Code states that: “Every corporation incorporated under this Code has the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation if it be a nonstock corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter into merger or consolidation with other corporations as provided in this Code; 9. To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; 10. To establish pension,

retirement, and other plans for the benefit of its directors, trustees, officers and employees; and 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation.”  Amendment of Articles of Incorporation Sec. 16 of the Corporation Code states that: “Unless otherwise prescribed by this Code or by special law, and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least 2/3 of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the provisions of this Code, or the vote or written assent of at least 2/3 of the members if it be a non-stock corporation.” *The following are excluded in counting the outstanding capital stock: 1. Treasury stock; 2. Unissued shares. *Aside from the votes of majority of the board and assent of the 2/3 of the OCS, the approval of the SEC is necessary for the amendment of the AOI. *There is an implied approval of the SEC, i.e., failure to act on the application filed by the corporation within 6 mos. Q: How to get the approval of the stockholders? A: 1. Call for a meeting; 2. Obtain the written assent of the stockholders. *In Tan v Sycip, the Supreme Court held that in case of a non-stock corporation, membership is personal and non-transferrable unless the bylaws provides otherwise. The deceased member is not entitled to vote. Four changes in Articles of Incorporation that require the approval of the stockholders. 1. Extension of corporate term; 2. Shortening of corporate term; 3. Increase or Decrease of Capital Stock; 4. Increase or Decrease of Bonded indebtedness. *Approval of Stockholders is necessary in these changes because they are necessary for the corporation’s existence.

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Extension/Shortening of Corporate Term Sec. 37 of the Corporation Code states that: “A private corporation may extend or shorten its term as stated in the articles of incorporation when approved by a majority vote of the board of directors or trustees and ratified at a meeting by the stockholders representing at least 2/3 of the outstanding capital stock or by at least 2/3 of the members in case of non-stock corporation. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That in case of extension of corporate term, any dissenting stockholder may exercise his appraisal right under the conditions provided in this code.” Increase or Decrease of Capital Stock/ Incurrence, Creation or Increase of Bonded Indebtedness Sec. 38 of the Corporation Code states that: “No corporation shall increase or decrease its capital stock or incur, create or increase any bonded indebtedness unless approved by a majority vote of the board of directors and, at a stockholders’ meeting duly called for the purpose, 2/3 of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the stockholders’ meeting at which the proposed increase or diminution of the capital stock or the incurring or increasing of any bonded indebtedness is to be considered , must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. xxx.”

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Q: When the corporation increases its capital stock, is the 25% requirement necessary? How can it be computed? A: YES. The SEC ruled that the 25% applies to the increase amount. *The corporation is required to maintain a sinking fund. Q: What does bonded indebtedness mean? A: Requires longer time of payment; special burden on the corporation; involves the important assets of the corporation. Denial of Pre-emptive Right Sec. 39 of the Corporation Code states that: “All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to 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.” *Coming from the increased authorized capital stock. * Similar to Right of First Refusal *It is not a matter of right. It can be denied by the corporation through denial of such right in the articles of incorporation. Purposes: 1. In order that the stockholder may be able to maintain their relative proportional voting trend and control in the corporation; 2. To avoid dilution of their proportionate voting and control in the corporation. General Rule: Pre-emptive right is available to stockholders. Exception: if it is denied in the Articles of Incorporation or through amendment. Exception to the Exception: Preemptive right shall not extend to: 1. Shares to be issued in compliance with laws requiring stock offerings or

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minimum stock ownership by the public; 2. 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; and 3. In payment of a previously contracted debt. *Pre-emptive right is satisfied as long as the corporation gives the stockholder the opportunity to buy the shares. *The offer must first be made to the stockholders. Sale or Disposition of Assets Sec. 40 of the Corporation Code states that: “ Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least 2/3 of the outstanding capital stock, or in case of non-stock corporation by the vote of at least 2/3 of the members, in a stockholders’ or members’ meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. xxx.”

Q: What makes the disposition peculiar? A: The disposition is of all or substantially all of the corporation’s properties and assets. Q: What kind of disposition involve? A: 1. Sell; 2. Lease; 3. Exchange; 4. Mortgage; 5. Pledge. Requirements: 1. Majority vote of the Board. 2. Vote of the Stockholders representing 2/3 of the OCS. 3. The sale does not bring about the illegal combinations and monopolies. *No need for the approval of the SEC. Tests: 1. Quantitative Test – no statutory test; pertains to the disposition of all assets 2. Qualitative Test – there is a statutory test; pertains to the disposition of substantially all of its assets. *The provision is so strict because the law wants the corporation will reach its expiration term. Q: With the sale of all the assets of the corporation, will the same result to its dissolution? A: NO. Possession or continued possession of corporate properties is not a condition for the existence of a corporation. Corporation still exists despite the disposition of all its properties and assets. Q: Will the buying corporation be made answerable for the liabilities of the selling corporation? A: NO. The two corporations are two separate personalities thus they are separate and distinct from each other hence the buying corporation cannot be held liable to the obligations of the selling corporation. General Rule: The sale of all or substantially all of the assets of the corporation does not make the buyer answerable for the obligations of the seller. Exceptions: 1. If the buyer expressly agrees to assume the obligations of the seller. 2. If sale amounts to merger or consolidation.

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3. If and when application of piercing the veil of corporate entity doctrine is warranted. 4. If the purchaser becomes a continuation of the seller. 5. Sale was done in violation of the Bulk Sales Law. Case: PNB v Andrada Acquisition of Corporate Shares Sec. 41 of the Corporation Code states that: “A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: 1. To eliminate fractional shares arising out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale; and 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code.” Requisites: 1. Unrestricted Retained Earnings 2. The acquisition must be for legitimate purpose Q: What is an unrestricted retained earnings? A: Earnings not allocated for any other purpose. Q: What happens to reacquired shares? A: General Rule: They are automatically deemed retired. Exception: The AOI provides otherwise.

Trust Fund Doctrine – The capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. 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. Corporation may not dissipate this and the creditors may sue stockholders directly for the unpaid subscription. 

Investment of Corporate Funds

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Sec. 42 of the Corporation Code states that: “Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least 2/3 of the outstanding capital stock, or by at least 2/3 of the members in the case of non-stock corporations, at a stockholders’ or members’ meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary.” Requisites: 1. Majority vote of the Board 2. Vote of the stockholders representing 2/3 OCS. Declaration of Dividends Sec. 43 of the Corporation Code states that: “The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than 2/3 of the outstanding

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro capital stock at a regular or special meeting duly called for the purpose. Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital stock, except: 1. When justified by definite corporate expansion projects or programs approved by the board of directors; or 2. When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or 3. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.” *This section is exclusive to stock corporations. Dividends – represents part of the earnings of the corporation which the board has decided to distribute among the stockholders. *The fact that the corporation has surplus earning does not mean that it is mandated to declare dividends; it is still upon the sound discretion of the board of directors. Reason: Trust Fund Doctrine *There must be a unrestricted retained earnings before dividends may be declared. *The board may opt to restrict its earnings, as the earnings may be allocated to legitimate business purpose. CASH DIVIDENDS does not require stockholders’ approval The stockholders receive cash Creditor-debtor relationship

STOCK DIVIDENDS Requires stockholders’ approval The stockholders receive stocks No creditor-debtor relationship

Requisites for declaration cash/property dividends: 1. Board approval 2. Unrestricted Retained Earnings

of

Requisites for declaration of stock dividends:

1. Unrestricted Retained Earnings; 2. Board approval; 3. Ratification by the stockholders. Q: Why stockholders’ ratification is necessary in the declaration of stock dividends? A: Because the earnings are capitalized. It is considered to be a corporate assets. Q: May the board be compelled to declare dividends? A: General Rule: NO. Exception: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paidin capital stock. Exceptions to the Exception: 1. Corporate expansion 2. Pursuant to loan agreement 3. Special circumstances/contingent liabilities Q: Are the stock dividends considered as watered stocks because the stockholder concerned does not pay anything therefor? A: NO. The unrestricted retained earnings are considered to be a consideration thus dividends received through stocks are not watered stocks. *The source of payment is the unrestricted retained earnings. Q: Are delinquent stockholders entitled to receive dividends? A: YES. But only in terms of cash dividends. Q: Who are entitled to receive dividends? A: Stockholders *In Nielson case, the SC held that dividends cannot be given to nonstockholders. *If there is date of record – Dividends may be received by those persons who are holders of stocks as of date of record. *If there is no date of record – dividends may be received by those persons who are holders of stocks as of the declaration. Q: When the corporation declares stock dividends, would it likewise create a creditor-debtor relationship between the corporation and the stockholder? A: NO. Stock dividends will not bring about a creditor-debtor relationship. When it comes to shareholdings, the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

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one holding the shares are considered investors; risk-takers. Q: Will legal compensation possible to occur? A: NO. The parties are not mutually creditor-debtor of each other. The requisites under the Civil Code on legal compensation are not present. Management Contract Sec. 44 of the Corporation Code states that: “No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That 1. Where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation; or 2. Where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owning at least 2/3 of the total outstanding capital stock entitled to vote, or by at least 2/3 of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than 5 years for any one term. The provisions of the next preceding paragraph shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise: Provided, however, That such service contracts or operating agreements which relate to the exploration, development, exploitation or utilization of natural resources may be entered

into for such periods as may be provided by the pertinent laws or regulations.” Requisite: General Rule: Majority vote of the OCS Exception: 2/3 of the OCS *SEC’s approval is not necessary *When the corporation enters into a management contract, appraisal right is NOT AVAILABLE to any dissenting stockholder. Reason: Sound business policy dictates that it would be better for the corporation, at the inception of its operation, to be managed by a company who has been experienced in a particular kind of business if the managed corporation needs the technical expertise, skills, experiences, background of another entity. CORPORATE BY-LAWS: A. Concept, Use and Nature of By-Laws By-Laws – relatively permanent and continuing rules of action adopted by the corporation for its own government and that of the individuals composing it and those having the direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities. Nature: Regulates internal affairs of the corporation. B. By-Laws in relation to Articles of Incorporation Distinction between By-Laws and Articles of Incorporation: By-Laws –is a condition subsequent. Articles of Incorporation – is a condition precedent. Essential for corporate existence. ARTICLES OF INCORPORATION

BY-LAWS

External affairs Affects the status of existence of the corporation

Internal Affairs Does not affect the status of the existence but has impact on the existence; failure to submit is a ground for disenfranchisement General Rule: joint decision Exception:

Joint decision of the board and stockholders

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Delegates the power to amend the ByLaws to the Board C. Adoption of By-Laws; Effect of Non-Filing within the prescribed period Sec. 46 of the Corporation Code states that: “Every corporation formed under this Code must, within 1 month after receipt of official notice of the issuance of its certificate of incorporation by the SEC, adopt a code of By-Laws for its government not inconsistent with this Code. For the adoption of By-Laws by the corporation the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, shall be necessary. The By-Laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, shall be filed with the SEC which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, By-Laws may be adopted and filed prior to incorporation; in such case, such By-Laws shall be approved and signed by all the incorporators and submitted to the SEC, together with the articles of incorporation. In all cases, By-Laws shall be effective only upon the issuance by the SEC of a certification that the By-Laws are not inconsistent with this Code. The SEC shall not accept for filing the By-Laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance companies, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such By-Laws or amendments are in accordance with law.” *Submission of By-Law is not a requirement for acquisition of corporate existence, however, for the corporation to be able to continue its corporate existence, the corporation is required to submit the corporate By-Law.

*Non-submission of the By-Laws within the prescribed period allowed by law is a ground for the dissolution of the corporation. *In Loyola Grandvillas Homeowners Association v CA, the SC held that failure to adopt a set of By-Laws within the prescribed period, notwithstanding the word used in the Code, the same would not result to automatic dissolution of the corporation. The failure to file by-laws would not, by itself, amount to dissolution or extinguishment of the corporate existence. *Section 46 of the Corporation Code must be read in conjunction with PD 902-A which outlines the procedure to be followed before the franchise/license of a private corporation may be suspended or revoked. *Observance of Due Process is necessary. *In Sawadjaan v CA, the SC held that meanwhile when the By-Laws is not yet submitted, the corporation, at that time, and the very least, may be considered as a De Facto Corporation and therefore, its right to exist as such cannot be inquired into or cannot be collaterally attacked in a private suit. It is for the State to initiate a proceeding questioning the existence, on the ground of its non-submission of ByLaws, within the prescribed period. D. Contents of By-Laws; Requisites of a Valid By-Law Provision Sec. 47 of the Corporation Code states that: “Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a private corporation may provide in its By-Laws for: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof; 7. The manner of election or

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the By-Laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.” Requisites: 1. It must be consistent with Corporation Code, other pertinent laws and regulations. 2. It must be consistent with the Articles of Incorporation. 3. It must be reasonable and not arbitrary or oppressive. 4. It must not disturb vested rights, impair contract or property rights of stockholders or members or create obligations unknown to law. E. Amendment to By-Laws Sec. 48 of the Corporation Code provides that: “The board of directors or trustees, by a majority vote thereof, and the owners of at least a majority of the outstanding capital stock, or at least a majority of the members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may amend or repeal any By-Laws or adopt new By-Laws. The owners of 2/3 of the outstanding capital stock or 2/3 of the members in a non-stock corporation may delegate to the board of directors or trustees the power to amend or repeal any By-Laws or adopt new By-Laws: Provided, That any power delegated to the board of directors or trustees to amend or repeal any By-Laws or adopt new By-Laws shall be considered as revoked whenever stockholders owning or representing a majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall so vote at a regular or special meeting. Whenever any amendment or new By-Laws are adopted, such amendment or new By-Laws shall be attached to the original By-Laws in the office of the corporation, and a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with the SEC the same to be attached to the original articles of incorporation and original By-Laws. The amended or new By-

Laws shall only be effective upon the issuance by the SEC of a certification that the same are not inconsistent with this Code.” F.

By-Laws in relation to Third Parties *In China Banking Corporation v CA, the SC held that in the absence of evidence that China Bank is aware of the provisions of the By-Laws, China Bank is not bound to observe the provisions of the By-Laws. Hence, China Bank must be allowed to register the shares in its name. General Rule: Third parties are not affected by the By-Laws. Exception: If the third party has actual knowledge of the provisions of the ByLaws.

CORPORATE MEETINGS: A. Kinds of Corporate Meetings Sec. 49 of the Corporation Code provides that: “Meetings of directors, trustees, stockholders, or members may be regular or special.” Kinds: a. Stockholders/Members: 1. Regular meeting 2. Special meeting b. Directors/Trustees: 1. Regular meeting 2. Special meeting Sec. 50 of the Corporation Code provides that: “Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees: Provided, That written notice of regular meetings shall be sent to all stockholders or members of record at least 2 weeks prior to the meeting, unless a different period is required by the by-laws. Special meetings of stockholders or members shall be held at any time deemed necessary or as provided in the by-laws: Provided, however, That at least 1 week written notice shall be sent to all stockholders or members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member. Whenever, for any cause, there is no person authorized to call a meeting, the SEC, upon petition of a stockholder or member on a showing of good cause therefor, may issue an order to the petitioning stockholder or member

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro directing him to call a meeting of the corporation by giving proper notice required by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have been chosen one of their number as presiding officer.” *Regular meeting of stockholders/members shall be held annually on a date fixed in the by-laws or if not so fixed, on any date in April of every year. Written notice of regular meetings shall be sent 2 weeks prior to the meeting unless a different period is required by the by-laws. ** Special meeting of stockholders/members shall be held at any time deemed necessary or as provided in the by-laws. Written notice shall be sent to all stockholders or members at least one week or unless otherwise provided in the by-laws. Sec. 53 of the Corporation Code provides that: “Regular meetings of the board of directors or trustees of every corporation shall be held monthly, unless the by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the by-laws. Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least 1 day prior to the scheduled meeting, unless otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or impliedly.” *Regular meetings of directors/trustees shall be held monthly unless the by-laws provide otherwise. *Special meetings of directors/trustees may be held at any time upon the call of the president or as provided in the bylaws. *Meetings of directors or trustees may be held anywhere in or outside of the Philippines unless the by-laws provide otherwise. *Notice of regular or special meetings stating the date, time and place of the

meeting must be sent to every director or trustee at least 1 day prior to the scheduled meeting unless otherwise provided by the by-laws. B. Requirements of a Meeting 1. It must be held at the proper place. 2. It must be held at the stated date and at the appointed time or at a reasonable time thereafter. 3. It must be called by the proper person. 4. There must be a previous notice. 5. There must be a quorum. Sec. 51 of the Corporation Code provides that: “Stockholders’ or members’ meetings, whether regular or special, shall be held in the city or municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation: Provided, That Metro Manila shall, for purposes of this section, be considered a city or municipality. Notice of meetings shall be in writing, and the time and place thereof stated therein. All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting.” *Applies to both stock and non-stock corporations. General Rule: The meeting must be held in the city or municipality where the principal office is located. Exception: Sec. 93 on non-stock corporations, the By-Laws may provide different venue for their meeting. *A casual reading of section 51 would say that a corporation cannot provide any other place for the meeting of stockholders. But in case of a non-stock corporation, Section 93 of the Corporation provides that the by-laws could provide any place for the meeting of its members provided that it is within the Philippines and proper notice has been given. Q: Is there a conflict between Section 51 and Section 93? A: YES. There is conflict but this conflict may be reconciled. As a rule, the by-laws may provide a different place of meeting provided that it is within the Philippines and notice has been given. As an

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro exception, if the by-laws is silent of the place of the meeting, section 51 applies. Sec. 52 of the Corporation Code provides that: “Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations.” General Rule: Majority of the OCS or Majority of the members Exception: Unless otherwise provided by the Code or by the By-Laws. *In Tan v Sycip, deceased member is not entitled to vote Sec. 54 of the Corporation Code provides that: “The president shall preside at all meetings of the directors or trustees as well as of the stockholders or members, unless the by-laws provide otherwise.” C. Right to Vote of Stockholders  Instances when voting right not available Sec. 6 of the Corporation Code provides that: “Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.” Instances when voting right is not available: 1. Delinquent shares 2. Treasury shares 3. Fractional shares 4. Escrow shares  Rules on: 1. Delinquent Shares Sec. 71 of the Corporation Code provides that: “No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholders’ meeting, nor shall the holder thereof 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 costs and expenses of advertisement, if any.” *Delinquency arises upon default in payment of subscription. Q: Are they included for quorum and voting purposes?

A: NO. Q: Even if there are proxies? A: YES. Q: Shares not yet fully paid but not yet delinquent, are they entitled to vote? A: YES. *Delinquent stock is not entitled to vote and his presence would not be taken for purposes of quorum. *The only right remain is the right to receive dividends subject to the provision of Section 43. 2. Escrow Shares *Escrow shares are not entitled to vote before the fulfillment of the condition imposed thereon. 3. Unpaid Shares Sec. 72 of the Corporation Code provides that: “Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder.” General Rule: The holder of unpaid shares can exercise the right to vote. Exception: If it is provided in the subscription contract that such right cannot be exercised until the subscription is fully paid. 4. Sequestered Shares Q: What is the reason for sequestration process? A: For investigative purposes; To avoid wastage dissipation of assets. Q: Is PCGG authorized to vote for the sequestered shares? A: General Rule: No. PCGG cannot vote for the sequestered shares because being a conservator/administrator, it should only perform acts of administration and not acts of ownership. Exception: If there is a strong evidence that indeed the shares have been purchased through public funds. Requisites: 1. Strong evidence or prima facie evidence that the shares are illgotten. 2. There is an imminent danger that the shares will be dissipated. Case: Transmiddle East v CA Q: During the pendency of sequestration process, are the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro sequestered shares included for quorum purposes? A: General Rule: YES. Q: Who can vote them? A: General Rule: Stockholder of record. *In Republic of the Philippines v COCOFED, the SC held that there is a prima facie evidence that the shares are purchased with the use of public funds. 5. Pledgor, Mortgagor or Administrator of Shares Sec. 55 of the Corporation Code provides that: “In case of pledged or mortgaged shares in stock corporations, the pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books. Executors, administrators, receivers, and other legal representatives duly appointed by the court may attend and vote in behalf of the stockholders or members without need of any written proxy.” Q: Can the pledgee/mortgagee exercise the right to vote? A: General Rule: No. The right to vote remains to the owner thus, it is the pledgor/mortgagor that can exercise it. Exception: If there is an agreement that the pledgee/mortgagee can exercise the right to vote. Case: Calapatia *Administrator/executor/heirs have the right to vote even without prior proxy. But the SEC requires them to submit letters of appointment or documents showing that he has been duly instituted as executor/administrator of the deceased. 6. Shares Jointly Owned Sec. 56 of the Corporation Code provides that: “In case of shares of stock owned jointly by two or more persons, in order to vote the same, the consent of all the co-owners shall be necessary, unless there is a written proxy,

signed by all the co-owners, authorizing one or some of them or any other person to vote such share or shares: Provided, That when the shares are owned in an “and/or” capacity by the holders thereof, any one of the joint owners can vote said shares or appoint a proxy therefor.” D. Concept of Proxy and Voting Trust Agreement Proxy is a written authorization given by one person to another so that the second person can act for the first. *Proxy is a representative. *Relationship: Principal-Agent. *Proxy is authorized to vote and also authorized to be present in a meeting. Functions: For quorum purposes; for voting purposes. *In Board meeting, proxy is not allowed (Sec. 25 of the Corporation Code). Sec. 58 of the Corporation Code provides that: “Stockholders and members may vote in person or by proxy in all meetings of stockholders or members. Proxies shall be in writing, signed by the stockholder or member and filed before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than 5 years at any one time.” Requisites: 1. Must be in writing 2. Filed before the scheduled meeting; under the SEC rule, 10 days before the scheduled meeting *Proxy ensures presence of a quorum and also approval of corporate acts. General Rule: Proxy is revocable. Exception: If proxy is coupled with interest. Ways to revoke proxy: 1. By execution of subsequent proxy. 2. If the stockholder concerned would appear in the scheduled meeting. Voting Trust Agreement 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 certificates are given to the stockholders, which are transferable

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro like stock certificates, subject however, to the trust agreement. PROXY The stockholder remains the stockholder of record Revocable

VOTING TRUST AGREEMENT The stockholder ceases to be a stockholder of record Irrevocable General Rule: 5 years Exception: If coupled with interest

*The transfer includes the transfer of legal title. Sec. 59 of the Corporation Code provides that: “One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding 5 years at any time: Provided, That in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding 5 years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the SEC; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement. The trustee or trustees shall execute and deliver to the transferors voting trust certificates, which shall be transferable in the same manner and with the same effect as certificates of stock. The voting trust agreement filed with the corporation shall be subject to examination by any stockholder of the corporation in the same manner as any other corporate book or record: Provided, That both the transferor and the trustee or trustees may exercise the right of

inspection of all corporate books and records in accordance with the provisions of this Code. Any other stockholder may transfer his shares to the same trustee or trustees upon the terms and conditions stated in the voting trust agreement, and thereupon shall be bound by all the provisions of said agreement. No voting trust agreement shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud. Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors. The voting trustee or trustees may vote by proxy unless the agreement provides otherwise.” Consequence: The stockholder entering into a voting trust agreement ceases to be a stockholder of record. *In case of Lee v CA, the SC held that the stockholder concerned loses his legal title to the shares so that if the stockholder is, at the same time, a director of the corporation, automatically he is disqualified to continue performing the duties of a director because the law requires each and every director to have legal, not beneficial title to at least one share. E. Derivative Suit; Concept and Requisites Derivative Suit is a suit brought by any stockholder, usually a minority shareholder, to redress a wrong committed against the corporation whenever the responsible officers refuse to take any action thereon or are the very person to be sued. *This prerogative is developed through jurisprudence. *This is expressly mandated by Sec. 31 of the Corporation Code. Q: Why derivative? A: From the word derive. The one bringing the suit derives the cause of action from the corporation. Q: Who brings the suit? A: Any stockholder/member usually minority stockholder. Q: Whose cause of action?

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro A: It is the corporation’s cause of action. Q: Are we in violation of the Code? A: No. Because the power to sue lies on the board thus when the board refuses to take action in order to protect the corporation derivative suit may be allowed. Compelling Reason: Inaction of the officers. Failure to discharge their responsibilities. Requisites: 1. The stockholder bringing the suit must be one of record as of the time the cause of action accrues as well as of the time the action is brought unless the cause of action is a continuing offer. *The stockholder must implead the real party in interest, i.e. the corporation. *In Chua v CA, the SC held that the corporation must be impleaded since it is the real party in interest. 2. The action must be named under the corporation’s name 3. General Rule: The stockholder bringing the suit must have exhausted intra-corporate remedies within the corporation. Exception: If the very person to be sued is the responsible officers themselves. **This is a condition precedent. 4. The suit is not intended to harass the defendant, not a nuisance or harassment suit. 5. Appraisal right must not be an available remedy. Individual suit is a suit filed by the stockholder because his personal right has been violated. The cause of action is personal to the stockholder. The party injured is the stockholder himself. Representative suit is a suit filed by a group of stockholders that suffered common injury. SUBSCRIPTION CONTRACT: A. Ways to become a Stockholder of a Corporation 1. Subscription contract with the corporation. 2. Purchase or acquisition of shares from existing stockholders. 3. Purchase of treasury shares from the corporation. *All of them involve shareholdings.

*Subscription is unique because it involves unissued shares. B. Concept of Subscription Contract Subscription Contract is, under Sec. 60 of the Corporation Code, “any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract.” *This is strictly regulated by the Corporation Code. C. Kinds of Subscription 1. Pre-incorporation subscription – one entered into before incorporation. Sec. 61 of the Corporation Code provides that: “A subscription for shares of stock of a corporation still to be formed shall be irrevocable for a period of at least 6 months from the date of subscription, unless all of the other subscribers consent to the revocation, or unless the incorporation of said corporation fails to materialize within said period or within a longer period as may be stipulated in the contract of subscription: Provided, That no pre-incorporation subscription may be revoked after the submission of the articles of incorporation to the SEC.” *Contracts between the subscribers. 2 Fold Characteristics: a. It is a contract between subscribers. b. May be regarded as continuing offer on the part of the subscriber concerned which the corporation may accept upon acquisition of juridical personality. Reason: The corporation is not yet in existence. 2. Post incorporation subscription – one entered into after the incorporation for the acquisition of unissued stock. *Contracts between the subscribers and the corporation. *Creates a creditor-debtor relationship. D. Consideration for the Issuance of Shares Sec. 62 of the Corporation Code provides that: “Stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be any or a

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 

combination of any two or more of the following: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed for or services actually rendered to the corporation; 4. Previously incurred indebtedness of the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares exchanged for stocks in the event of reclassification of conversion. Where the consideration is other than actual cash, or consists of intangible property such as patents of copyrights, the valuation thereof shall initially be determined by the incorporators or the board of directors, subject to the approval by the SEC. Shares of stock shall not be issued in exchange for promissory notes or future service. The same considerations provided for in this section, insofar as they may be applicable, may be used for the issuance of bonds by the corporation. The issued price of no-par value shares may be fixed in the articles of incorporation or by the board of directors pursuant to authority conferred upon it by the articles of incorporation or the by-laws, or in the absence thereof, by the stockholders representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose.” Valid considerations for the subscription agreements: 1. Cash 2. Property 3. Labor or services actually rendered to the corporation 4. Prior corporate obligations 5. Amounts transferred from unrestricted retained earnings to stated capital 6. Outstanding shares in exchange for stocks in the event of reclassification or conversion. E. Payment of Subscription Q ： When payment of the subscription is made? A: Look into the subscription agreement. If subscription agreement is silent as to when the amount of subscription to be paid, the board of directors may call on all the unpaid subscribers to pay the remaining balance of their subscription.

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F.

Remedies to enforce payment of subscription 1. By Extra-judicial sale at public auction. 2. By judicial action. 3. Collection from cash dividends and withholding of stock dividends. When shares are considered delinquent Sec. 67 of the Corporation Code provides that: “Subject to the provisions of the contract of subscription, the board of directors of any stock corporation may at any time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such percentage thereof, in either case with accrued interest, if any, as it may deem necessary. Payment of any unpaid subscription or any percentage thereof, together with the interest accrued, if any, shall be made on the date specified in the contract of subscription or on the date stated in the call made by the board. Failure to pay on such date shall render the entire balance due and payable and shall make the stockholder liable for interest at the legal rate on such balance, unless a different rate of interest is provided in the by-laws, computed from such date until full payment. If within 30 days from the said date no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale as hereinafter provided, unless the board of directors orders otherwise.” *If there was no date as to payment of subscription stated in the subscription agreement, the board may call on all the unpaid subscribers to pay the remaining balance of their subscription. Failure to pay within 30 days from the said date, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to sale unless the board of directors orders otherwise.

Certificate of Stock Certificate of Stock is a written evidence of the shares of stock but it is not the share itself. *Does not represent credit. Q: How important is a stock certificate?

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro A: It is an evidence of ownership of stocks. Q: Who issue stock certificate? A: Stock certificates must be signed by the president or vice-president, countersigned by the secretary or assistant secretary. Q: When certificate of stock may be issued? A: Sec. 64 of the Corporation Code states that: “No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with interest and expenses (in case of delinquent shares), if any is due, has been paid.”  Doctrine of Indivisibility of Subscription Contract Doctrine of Indivisibility of Subscription Contract: Failure to pay any of the installments due would necessarily affect all the other installments because the subscription is to be treated as one, whole, entire, indivisible contract. Upon default of payment on any of the installment results to entire subscription due and demandable. *The Certificate of Stock cannot be divided into portions. *No certificate of stock shall be issued until the full payment of the subscription. *The corporation has an automatic lien over the shares. Q: What will happen to the payment already made by the subscriber? A: The payment partially made shall be applied proportionately to all the shares covered by the subscription. Example: P10 per share; payment made is P6000 covering 1000 shares. The P6000 shall be allocated equally to all shares. P6 per share has been paid. P4 per share is the liability.  Certificate of Stock, quasi-negotiable Q: can the stock certificate be treated as negotiable instrument under NIL? A: No. The requisites are not complied with. There is no engagement to pay in sum certain in money. *Negotiable instrument represents credit. Creditor-debtor relationship arises. Q: Are certificates of stock negotiable? A: They are negotiable in certain extent. That is why they are quasinegotiable.

*The title over the share can be assigned, transferred by indorsement and delivery. *Due course holding is not applicable. G. Transfer of Shares If represented by a certificate, the following must be strictly complied with: 1. Delivery of the certificate; 2. Indorsement by the owner or his agent; 3. To be valid to third parties, the transfer must be recorded in the books of the corporation. *If not represented by the certificate, the shares may be transferred by means of a deed of assignment and such is duly recorded in the books of the corporation. *To make the transfer binding to the corporation and third person, the transfer must be recorded in the stock and transfer book of the corporation. Q: Who is the owner of the share? A: The stockholder of record. H. Lost and Destroyed Certificate of Stock Sec. 73 of the Corporation Code provides that: “The following procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed: 1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate was lost, stolen or destroyed, the number of shares represented by such certificate, the serial number of the certificate and the name of the corporation which issued the same. He shall also submit such other information and evidence which he may deem necessary; 2. After verifying the affidavit and other information and evidence with the books of the corporation, said corporation shall publish a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for 3 consecutive weeks at the expense of the registered owner of the certificate of stock which has been lost, stolen or destroyed. The notice shall state the name of said corporation, the name of the registered owner and the serial number of said certificate, and the number of shares represented by such certificate, and that

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro after the expiration of 1 year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock, unless the registered owner files a bond or other security in lieu thereof as may be required, effective for a period of 1 year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the 1 year period provided herein: Provided, That if a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final decision by the court regarding the ownership of said certificate of stock which has been lost, stolen or destroyed. Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described.” CORPORATE BOOKS AND RECORDS: A. Books required to be kept by a Corporation Sec. 74 of the Corporation Code provides that: “Every corporation shall keep and carefully preserve at its principal office a record of all business transactions and minutes of all meetings of stockholders or members, or of the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if special its object, those present and absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the minutes; and on a similar

demand, the yeas and nays must be taken on any motion or proposition, and a record thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action must be recorded in full on his demand. The records of all business transactions of the corporation and the minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation’s records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand. Stock corporations must also keep a book to be known as the “stock and transfer book,” in which must be kept a record of all stocks in the names of the stockholders alphabetically arranged; the installments paid and unpaid on all stock for which subscription has been made, and the date of payment of any installment; a statement of every alienation, sale or transfer of stock made, the date thereof, and by and to whom made; and such other entries as the by-laws may prescribe. The stock and transfer book shall be kept in the principal office of the corporation or in the office of its stock

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro transfer agent and shall be open for inspection by any director or stockholder of the corporation at reasonable hours on business days. No stock transfer agent or one engaged principally in the business of registering transfers of stocks in behalf of a stock corporation shall be allowed to operate in the Philippines unless he secures a license from the SEC and pays a fee as may be fixed by the Commission, which shall be renewable annually: Provided, That a stock corporation is not precluded from performing or making transfer of its own stocks, in which case all the rules and regulations imposed on stock transfer agents, except the payment of a license fee herein provided, shall be applicable.” *Keeping of books and records are mandatory. Books required to be kept: 1. Book of minutes – reflects the decisions and actions of the Board of Directors/Stockholders. 2. Record of all business transactions 3. Stock and Transfer Book/Membership Book 4. Books of Proceedings B. Right to Inspect Corporate Books  Basis and Extent of the Right of Inspection Q: Is the keeping of these books mandatory? A: YES. Section 144 of the Corporation Code provides penalty for any violation of the provision of the Code. Rationale: Right of inspection would be futile. Right of inspection would not be exercised.  Limitations on the Right of Inspection 1. The books and records shall be open to inspection at reasonable hours on business days. 2. The books and records shall not be improperly used any information secured through any prior examination of the books or records. 3. The stockholder’s demand must be in good faith or for a legitimate purpose. *Inspection can be done personally or through agent.  Remedies to Enforce Right of Inspection *In case of refusal to exercise the right of inspection, the stockholder

concerned may file an action mandamus before the RTC. *Can also claim damages.

for

MERGER AND CONSOLIDATION: A. Concept of Merger and Consolidation Merger is one where a corporation absorbs the other and remains in existence while the others are dissolved. *There is a continuous flow of juridical personality. Examples: A+B=B A+B+C=C A+B+C=A A+B+C=B Consolidation is one where a new corporation is created, and consolidating corporations are extinguished. Examples: A+B=C A+B+C=D A + B + C = ABC A + B + C = XYZ B. Requisites of and Procedure for Merger and Consolidation 1. Approval by majority vote of the Board of Directors of each corporation. 2. Approval of the stockholders of each corporation representing 2/3 of the outstanding capital stock. 3. Approval of SEC Cases: Associated Bank v CA; Polyan v CA Procedure: 1. The Board of each corporation shall draw up a plan of merger/consolidation. 2. The plan of merger or consolidation shall be approved by majority vote of each board of the concerned corporations at separate meetings. 3. The plan of merger/consolidation shall be approved by the majority vote of the 2/3 of the shareholders of the outstanding capital stock or members in case of a non-stock corporation. 4. Articles of Merger/Consolidation shall be executed by each of the constituent corporators, signed by the President or Vice-President and certified by the secretary or assistant secretary. 5. Four copies of the Articles of Merger or Consolidation together with favorable recommendation of a pertinent government agency in certain cases shall be submitted to the SEC for approval.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 6. The SEC shall issue a certificate or merger if it is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of this Code and existing laws. C. Effects of Merger or Consolidation 1. 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. 2. The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each of the constituent corporations. 3. 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. 4. 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. 5. Dissolution of other corporation leaving the surviving or consolidated corporation exists. Remedy of the dissenting stockholder: The dissenting stockholder may exercise his appraisal right. RIGHT OF APPRAISAL: A. Concept of Appraisal Right Appraisal Right is the right to withdraw from the corporation and demand payment of the fair value of his shares after dissenting from certain corporate acts involving fundamental changes in corporate structure. *Demanding for the reasonable return of investment. *Stockholders cannot exercise this right at his pleasure. Requisites: 1. The Stockholder has dissented 2. Corporate change must have been approved by the SEC. *Any changes that affect the stockholders’ right. *Any changes that concern the corporation’s existence. *Corporate changes that appraisal right can be availed of.

3. There must have an unrestricted retained earnings, *It is not a matter of right. Reason: If it is a matter of right it shall lead to the diminution or depletion of corporate assets which is violative of the Trust Fund Doctrine. B. Instances of Appraisal Right Sec. 81 of the Corporation Code provides that: “Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of his shares in the following instances: 1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence; 2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and 3. In case of merger or consolidation.” C. Requirements for a Valid Exercise of Appraisal Right Sec. 82 of the Corporation Code provides that: “The appraisal right may be exercised by any stockholder who shall have voted against the proposed corporate action, by making a written demand on the corporation within 30 days after the date on which the vote was taken for payment of the fair value of his shares: Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented or affected, the corporation shall pay to such stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If within a period of 60 days from the date the corporate action was approved by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by 3 disinterested persons, one of whom shall be named by the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro stockholder, another by the corporation, and the third by the two thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within 30 days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment: and Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his shares to the corporation.” Requisites: 1. Any of the instances set forth by law must be present. 2. Dissenting stockholder must have voted against the proposed action. *Abstaining stockholder cannot claim or exercise his appraisal right. 3. Demand for payment must be made within 30 days from the date vote is taken thereon. Failure to make demand shall be deemed a waiver. 4. Price must be based on fair value as of day prior to date on which vote was taken 5. Submission by withdrawing stockholder of his shares to the corporation for notation of being a dissenting stockholder within 10 days from written demand. 6. Payment must be made only when the corporation has unrestricted retained earnings in its books. 7. Stockholder must transfer his shares to the corporation upon payment by the corporation. D. Effects of Exercising Appraisal Right Sec. 83 of the Corporation Code provides that: “From the time of demand for payment of the fair value of a stockholder’s shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored.”

Effects: 1. All rights accruing to such shares shall be suspended from the time of demand for payment of the fair value of the shares until either the abandonment of the corporate action. 2. The dissenting stockholder shall be entitled to receive payment of the fair value of his shares as agreed upon between him and the corporation or as determined by the appraisers chosen by them. *Sec. 86. The dissenting stock can be sold during the pendency of its payment. Remedy in case appraisal right cannot be exercised: Dispose the shareholdings. NON-STOCK CORPORATIONS: A. Definition and Purposes of a Non-Stock Corporation Sec. 87 of the Corporation Code states that: “For the purposes of this Code, a non-stock is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of this Code on dissolution: Provided, That any profit which a nonstock corporation may obtain as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title. The provisions governing stock corporations, when pertinent, shall be applicable to nonstock corporations, except as may be covered by specific provisions of this Title.” *Sec. 87 should be read in harmony with Sec. 94. *A Non-stock corporation is not precluded from engaging in profit-business related. Sec. 88 of the Corporation Code provides that: “Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this Title governing particular classes of nonstock corporations.” *The purpose of a non-stock corporation is related to public welfare.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro B. Distinguished from Stock Corporation Non- stock Corporation Public welfare Board of Trustees Generally, the term of office of trustees is 3 years By-laws can provide for a different venue as long as it is within the Philippines Member may be deprived of their right to designate proxies by provisions in the articles of incorporation or bylaws Reason: To promote camaraderie, togetherness, unity and familiarity. Generally, members could directly elect officers. Except unless AOI provides otherwise.

Stock Corporation For profit Board of directors 1 year subject to hold-over principle City or municipality where the principal office is located Proxy is allowed

Election is vested upon Board of Directors

C. Membership in a Non-Stock Corporation Sec. 89 of the Corporation Code provides that: “The right of the membership of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote. Unless otherwise provided in the articles of incorporation of the by-laws, a member may vote by proxy in accordance with the provisions of this Code. Voting by mail or other similar means by members of non-stock corporations may be authorized by the bylaws of non-stock corporations with the approval of, and under such conditions which may be prescribed by, the SEC.” General Rule: Sec. 58 Exception: Sec. 89. This provision allows denial of proxy. Reason: To promote camaraderie, togetherness, unity and familiarity. *A member is entitled to 1 vote. However, such right may be limited, broadened or

denied in the Articles of Incorporation or By-Laws. Thus, the By-laws of a non-stock corporation may provide for the desired voting rights of members including the number of votes. Sec. 90 of the Corporation Code provides that: “Membership in a non-stock corporation and all rights arising therefrom are personal and nontransferable, unless the articles of incorporation or the by-laws otherwise provide.” General Rule: Membership is nontransferable. Exception: If the Articles of Incorporation or the By-laws provide otherwise. Sec. 91 of the Corporation Code provides that: “Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws. Termination of membership shall have the effect of extinguishing all rights of a member in the corporation or in its property, unless otherwise provided in the articles of incorporation or the by-laws.” Rules on Place of Meeting: General Rule: Sec. 51 Exception: Sec. 93 D. Rule on Distribution of Assets Sec. 94 of the Corporation Code provides that: “In case dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 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 the 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 the 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 according to a

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro plan of distribution adopted pursuant to this Chapter; 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the bylaws, determine the distributive rights of members, or any class or classes of members, or provide for distribution; and 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter.” Order of distribution: 1. All its creditors shall be paid; 2. Assets held subject to return on dissolution, shall be delivered back to their givers; 3. Assets held for charitable, religious purposes, etc., without a condition for their return on dissolution, shall be conveyed to one or more organizations engaged in similar activities as dissolved corporation; and 4. All other assets shall be distributed to members, as provided for in the Articles or By-Laws. Sec. 95 of the Corporation Code provides that: “A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner: The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to each member entitled to vote, within the time and in the manner provided in this Code for the giving of notice of meetings to members. Such plan of distribution shall be adopted upon approval of at least 2/3 of the members having voting rights present or represented by proxy at such meeting.” Q: Would it be possible for a non-stock corporation to be converted into a stock corporation by mere amendment of the Articles of Incorporation?

A: NO. Because it would violate Section 87 of the Corporation Code which prohibits distribution of income as dividends to members. Reason: Fraudulent to donors Q: Can a stock corporation be converted to a non-stock corporation by mere amendment of the Articles of Incorporation? A: YES. Requirements: 1. Approval of 2/3 of the members 2. Approval of the SEC Q: What was relinquished? A: Proprietary rights. *Appraisal right is available. CLOSE CORPORATIONS: A. Concept; Distinguished from Open Corporations Sec. 96 of the Corporation Code states that: “A corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding 20; (2) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Any corporation may be incorporated as a close corporation, except mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest in accordance with the provisions of this Code. The provisions of this Title shall primarily govern close corporations: Provided, That the provisions of other Titles of this Code shall apply suppletorily except insofar as this Title otherwise provides.” *Whether open or close corporation depends on its charter. Case: San Juan Structural

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro The following must be stated in the Articles of Incorporation: 1. Membership is limited to 20 2. Transfer or disposition of shares is subject to specified restrictions 3. Prohibition against offering to the public of the shares or listing in the stock exchange. General Rule: Any corporation may be incorporated as close corporation. Exceptions: 1. Mining or oil companies 2. Stock exchanges 3. Banks 4. Insurance companies 5. Public utilities 6. Educational institutions 7. Corporations declared to be vested with public interest

Code The appraisal right may be exercised by a stockholder only in the cases provided in Sections 81 and 42 of the Corporation Code Except as regards redeemable shares, the purchase by the corporation of its own stock must always be made from the unrestricted retained earnings

Distinctions from Open Corporations:

Arbitration of intracorporate deadlock by the SEC is not a remedy in case the directors or stockholders are so divided respecting the management of the corporation.

Open Corporation Its articles of incorporation need only contain the general matters enumerated in Section 14 of the Corporation Code

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 The pre-emptive right is subject to the exceptions found in Section 39 of the Corporation

Close Corporation Its articles must contain the special matters prescribed by Section 97 aside from the general matters in Section 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 The pre-emptive 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 the directors or stockholders are so divided respecting the management of the corporation.

*In San Juan Structural Steel Fabricators v CA, the SC held that the circumstance that around 99.86% of the total share holding of petitioner belongs to respondent would not justify classification of the corporation as close. B. Permissive Provisions in the Articles of Incorporation Sec. 97 of the Corporation Code provides that: “The articles of incorporation of a close corporation may provide: 1. For a classification of shares or rights and the qualifications for owning or holding the same and restrictions on their transfers as may be stated therein, subject to the provisions of the following section; 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. The articles of incorporation of a close corporation may provide that the business of the corporation may provide that the business of the corporation shall be managed by

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: 1. No meeting of stockholders need be called to elect directors; 2. Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code; and 3. The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors.” C. Restrictions on Transfer of Shares Sec. 98 of the Corporation Code provides that: “Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell his shares to any third person.” Option Restriction – this restriction provides that no disposition of shares will be made unless the shares are offered first to the corporation or the stockholders. *Pre-emptive right is exercisable or available. *This restriction is valid and allowed. Reason: it is the one contemplated by law. *Restriction derogates private rights. Consent Restriction – this restriction provides that no disposition of shares will be made without the consent of directors. *This restriction is not valid. Reason: It is more onerous and burdensome. CORPORATE DISSOLUTION/LIQUIDATION: A. Methods of Voluntary Corporate Dissolution and the Requirements therefor

Dissolution refers to the extinguishment of franchise or termination of corporate existence. Modes of Dissolution: 1. Voluntary dissolution 2. Involuntary dissolution Methods of Voluntary Dissolution: 1. Voluntary dissolution where no creditors are affected 2. Voluntary dissolution where creditors are affected 3. Shortening of the corporate term by amending the articles of incorporation *Dissolution takes effect upon the coming of the shortened term. 4. Expiration of corporate term 

Voluntary dissolution where no creditors are affected Sec. 118 of the Corporation Code provides that: “If dissolution of a corporation does not prejudice the rights of any creditor having a claim against it, the dissolution may be effected by majority vote of the board of directors or trustees, and by a resolution duly adopted by the affirmative vote of the stockholders owning at least 2/3 of the outstanding capital stock or of at least 2/3 of the members of a meeting to be held upon call of the directors or trustees after publication of the notice of time, place and object of the meeting for 3 consecutive weeks in a newspaper published in the place where the principal office of said corporation is located; and if no newspaper is published in such place, then in a newspaper of general circulation in the Philippines, after sending such notice to each stockholder or member either by registered mail or by personal delivery at least 30 days prior to said meeting. A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of directors or trustees and countersigned by the secretary of the corporation. The SEC shall thereupon issue the certificate of dissolution.” Requisites: 1. A meeting must be held on the call of the directors or trustees; 2. Notice of the meeting should be given to the stockholders by personal delivery or registered mail

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

3.

4.

5.

6.



at least 30 days prior to the meeting; The notice of meeting should also be published for 3 consecutive weeks in a newspaper published in the place; The resolution to dissolve must be approved by the majority of the directors/trustees and approved by the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of members; A copy of the resolution shall be certified by the majority of the directors or trustees and countersigned by the secretary; The signed and countersigned copy will be filed with the SEC and the latter will issue the certificate of dissolution

Voluntary dissolution where creditors are affected Sec. 119 of the Corporation Code provides that: “Where the dissolution of a corporation may prejudice the rights of any creditor, the petition for dissolution shall be filed with the Securities and Exchange Commission. The petition shall be signed by a majority of its board of directors or trustees or other officers having the management of its affairs, verified by its president or secretary or one of its directors or trustees, and shall set forth all claims and demands against it, and that its dissolution was resolved upon by the affirmative vote of the stockholders representing at least twothirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members at a meeting of its stockholders or members called for that purpose. If the petition is sufficient in form and substance, the Commission shall, by an order reciting the purpose of the petition, fix a date on or before which objections thereto may be filed by any person, which date shall not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. Before such date, a copy of the order shall be published at least once a week for three (3) consecutive weeks in a newspaper of general circulation published in the municipality or city where the principal office of the corporation is situated, or if there be no such newspaper, then in a newspaper of general circulation in the Philippines, and a similar copy shall be posted for three (3)

consecutive weeks in three (3) public places in such municipality or city. Upon five (5) day's notice, given after the date on which the right to file objections as fixed in the order has expired, the Commission shall proceed to hear the petition and try any issue made by the objections filed; and if no such objection is sufficient, and the material allegations of the petition are true, it shall render judgment dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation.” Requisites: 1. Approval of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of members in a meeting called for that purpose; 2. Filing of a Petition with the SEC signed by majority of directors or trustees or other officers having the management of its affairs verified by President or Secretary or Director. Claims and demands must be stated in the petition; 3. If petition is sufficient in form and substance, the SEC shall issue an Order fixing a hearing date for objections; 4. A copy of the Order shall be published at least once a week for 3 consecutive weeks in a newspaper of general circulation or if there is no newspaper in the municipality or city of the principal office, posting for 3 consecutive weeks in 3 public places is sufficient; 5. Objections must be filed no less than 30 days nor more than 60 days after the entry of the order; 6. After the expiration of the time to file objections, a hearing shall be conducted upon prior 5 day notice to hear the objections; 7. Judgment shall be rendered dissolving the corporation and directing the disposition of assets; the judgment may include appointment of a receiver. 

Shortening of term of existence Sec. 120 of the Corporation Code provides that: “A voluntary dissolution may be effected by amending the articles of incorporation to shorten the corporate term pursuant to the provisions of this Code. A copy of the amended articles of incorporation shall

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro be submitted to the Securities and Exchange Commission in accordance with this Code. Upon approval of the amended articles of incorporation of the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings, subject to the provisions of this Code on liquidation.” B. Concept of Involuntary Dissolution and the Grounds therefor Sec. 121 of the Corporation Code provides that: “A corporation may be dissolved by the Securities and Exchange Commission upon filing of a verified complaint and after proper notice and hearing on the grounds provided by existing laws, rules and regulations.” *This must be done with substantive and procedural due process. Grounds: 1. Failure to submit by-laws within the prescribed period 2. Fraud in the procurement of Certificate of Registration 3. Misrepresentation as to the activities that the corporation will undertake 4. Treasurer’s affidavit is false 5. Continued inoperation for 5 years 6. Failure to commence business transactions within 2 years from issuance of certificate of registration 7. To some cases, performance of ultra vires act since it is a violation to the franchise but depending on the seriousness or gravity of the offense 8. Issuance of watered stocks 9. De facto status 10. Failure to keep corporate books and records depending on the gravity or seriousness of the offense 11. Violation of its charter C. Corporate Liquidation Liquidation is a process by which all the assets of the corporation are converted into liquid assets in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders. *Liquidation takes place after dissolution. Sec. 122 of the Corporation Code provides that: “Every corporation whose charter expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall nevertheless be continued

as a body corporate for three (3) years after the time when it would have been so dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. From and after any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. Upon the winding up of the corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities.” D. Methods of Liquidation or Winding Up 1. By Board of Directors 2. Through a trustee to whom the properties are conveyed 3. By management committee or rehabilitation receiver Q: Can the 3 year period be extended? A: NO. Reason: Beyond the 3 year period, there is no corporate existence for all purposes subject to doctrine of relation. Remedy: Before the expiration of the 3 year period, appoint a trustee/receiver. Q: During the 3 year period, does the corporation enjoy corporate existence? A: YES. But for limited purpose only, i.e., for liquidation purposes only. (Limited existence) Q: May such corporation sue during the 3 year period?

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro A: YES. But only when the subject matter is related to liquidation and winding up of its remaining affairs. *In case trustee/receiver is appointed, he is not bound by the 3 year period. *In Gelano v CA, the SC held that the lawyer of the corporation can be considered as trustee. The term trustee must be considered in its generic sense. Anyone who has been designated by the corporation to act on its behalf could be considered as trustee for purposes of pursuing a claim for and on behalf of the corporation. A lawyer falls within the ambit of the word “trustee.” *Appointment of trustee can be inferred from the conduct of the corporation. This is by Implication. *If the corporation is the creditor appoint a trustee. If the corporation is the debtor appoint a receiver. Q: What if the corporate properties have already been distributed among the shareholders without trustee/receiver? A: Remedy: Run after the erring directors and officers. E. Concept of Rehabilitation; Effects of Appointment of Management Committee or Receiver Rehabilitation connotes a reopening or reorganization. Contemplates a continuance of corporate existence in an effort to restore the corporation to its former successful operation. *This is a remedy expressly allowed under Section 6 of PD 902-A. Purpose: To make the corporation financially viable again. Substantive Grounds: 1. When there is imminent danger of dissipation or wastage of corporate assets 2. Serious paralyzation of business which would work to the prejudice of the stockholders and creditors of the corporation *Mere misconduct of an officer is not a ground for corporate rehabilitation. *A corporation cannot ask for corporate rehabilitation and at the same time dissolution. *With the passage of RA8799, the remedy could now be instituted with the proper RTC. Effect: Stay Order - stops or suspends the enforcement of all claims for money or

otherwise whether enforcement is by court or not, until rehabilitation proceedings are terminated. Cases: PAL v Garcia; Sobrejuanite; Lingkod Manggagawa ng Rubberworld v Rubberworld Philippines; RCBC v IAC *In PAL v Garcia, the SC held that stay order suspends all enforcement in all stages of the proceedings. *In Lingkod Manggagawa sa Rubberworld v Rubberworld Philippines, the SC held that labor claims are likewise affected by the Stop order. *In RCBC v IAC, the SC held that whether creditors are secured or not, stay order will still affect them. The preference still remains it is just the enforcement that is suspended. FOREIGN CORPORATIONS: A. Concept of Foreign Corporation Foreign Corporation is 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 of the Corporation Code provides that: “For the purposes of this Code, a foreign corporation is one formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with this Code and a certificate of authority from the appropriate government agency.” Reciprocity Clause provides that the foreign laws allow Filipino citizens and corporations to do business in its own country or state. B. Tests to Determine Nationality of a Corporation 1. Incorporation Test – when the corporation is incorporated, organized under the law of other country. 2. Control Test – for purposes of investment; the citizenship of a particular corporation is to be determined by the citizenship of the controlling stockholders.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

C. Concept of “Doing Business” and the License Requirement therefor Substance Test provides that: a foreign corporation is doing business in the country if it is continuing the body or substance of the enterprise of business for which it was organized. Continuity Test provides that: doing business implies a continuity of commercial dealings and arrangements, and contemplates to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and object of its organization. *Foreign Corporation is required to obtain license from the SEC to enable them to do business in the Philippines. *The foreign corporation must appoint a resident agent so that court may acquire jurisdiction over the foreign corporation *License is essential if there is an intention to maintain main or substance of the business in the Philippines or to continue the same. *Lack of license does not affect the validity of the transaction. *License is for regulatory purposes. *License requirement does not prevent performance of acts that are isolated from the main business of the corporation and there is no intent to continue the same in the Philippines. *If the foreign corporation is not licensed to do business in the Philippines, General Rule: they have no access in Philippine Courts Exceptions: 1. Isolated transactions 2. Infringement of trademark *International offense can be sued anywhere. Cases: Expert Travel Tours v CA; Home Insurance v Eastern Shipping Lines *In Expert Travel Tours v CA, the SC held that resident agent is not with authority to execute a certification of Forum shopping following Sec. 23 of the Corporation Code. *In Home Insurance v Eastern Shipping Lines, the SC held that if at the time the suit was brought, the suing foreign entity already have license to do business in the Philippines, the suit will be allowed although at the time the

transaction was made it does not have the requisite of a license to do so, the remedial defect is cured. Cases: Japan Airlines v CA *In Japan Airlines v CA, the SC held that the selling of tickets though there is no aircraft landing in the Philippines constitute doing business in the Philippines. *In Ericks v CA, the SC held that license is necessary in order the foreign corporation may sue. In this case, the court considered the continuity test, they found out that the foreign corporation has the intent to continue business in the Philippines. *Credit is obtained to maintain longer transactions. D. Effects of Being Issued a License 1. They are placed under the jurisdiction of the Philippine courts 2. They are placed under the same footing as domestic corporations 3. The public is protected in dealing with foreign corporations. E. Revocation and Withdrawal of License Grounds for Revocation: 1. Failure to file its annual report or pay any fees as required by the Corporation Code 2. Failure to appoint and maintain a resident agent in the Philippines as required by the Corporation Code 3. Failure, after change of its resident agent or his address, to submit to the SEC a statement of such change as required by the Corporation Code 4. Failure to submit to the SEC an authenticated copy of any amendment to its articles of incorporation or bylaws or of any articles of merger or consolidation within the time prescribed by the Corporation Code 5. A misrepresentation of any material matter in any application, report affidavit or other document submitted by such corporation pursuant to the provisions of the Corporation Code 6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivision 7. Transacting business in the Philippines outside of the purpose or purposes for

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro which such corporation is authorized under its license 8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the Philippines 9. Any other ground as would render it unfit to transact business in the Philippines.

Applicable Laws: 1. Code of Commerce of Letters of Credit Article 568 of the Code of Commerce provides that: “A letter of credit shall: 1. Be issued in favor of a definite person and not to orders; and 2. Be limited to a fixed and specified amount or to one or more undetermined amount but with maximum limit stated exactly.” *Letter of credit is not a negotiable instrument. 2. Customs, primarily those embodied in the Uniform Customs and Practice for Documentary Credits which was adopted by the International Chamber of Commerce Parties to a Letter of Credit:

LETTERS OF CREDIT Definition: Q: What is a letter of credit? A: Letters of Credit is an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Example: importation of purchase of goods Q: Are you applying a loan when you open a letter of credit? A: YES. Reasons why businessmen open letter of credit: 1. Lack of funds 2. Security purposes 3. Don’t want to part his money until the goods are received Q: What are the relationships may arise in a letter of credit? A: General Rule: Three relationships they are: 1. Buyer-seller (contract of sale); 2. Issuing bankbeneficiary; and 3. Issuing bank-buyer (contract of loan) Usual conditions imposed by the bank: 1. Financial capacity; 2. collateral

1. Buyer – one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the document of title. 2. Issuing Bank – one 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. 3. Seller – one who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment. 4. Advising (notifying) Bank – may be utilized to convey to the seller the existence of the credit. 5. Confirming Bank – which will lend credence to the letter of credit issued by a lesser known issuing bank; the confirming bank is directly liable to pay the sellerbeneficiary. 6. Paying Bank – which undertakes to encash the drafts drawn by the exporter/seller. 7. Negotiating Bank *Most common parties are the buyer, seller and issuing bank. Transactions involved in a Letter of Credit: a. Independence Principle This principle provides that the three contracts entered into in this transaction, the contracts are: 1. Contract of sale between the buyer and seller; 2. Contract of the buyer with the issuing bank; and 3. Letter of Credit proper, are separate from each other thus any infirmity from one

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro contract does not affect the other contracts. A direct consequence of this principle is the rule that banks only deal with documents and not with goods, services or obligations to which they relate. *In BPI v De Reny, the SC held that the bank has no obligation to inquire the specifications of the goods. b. Fraud Exception Principle c. Rule of Strict Compliance This rule provides that the documentary requirements imposed by the issuing bank must be strictly complied with by the beneficiary otherwise the issuing bank cannot ask for reimbursement. Usual documents submitted to the bank: 1. Vouchers; 2. Contract of sale; and 3. Purchase orders

bank that the drafts already drawn by the beneficiary have been reimbursed to the opening bank by the buyer. e. Back-to-Back Letter of Credit – a credit with identical documentary requirements and covering the same merchandise as another letter of credit, except for a difference in the price of the merchandise as shown by the invoice and the draft. The second letter of credit can be negotiated only after the first is negotiated.

Types of Letters of Credit: a. Irrevocable Letter of Credit – is a definite undertaking on the part of the issuing bank and constitutes the engagement of that bank to the beneficiary and bona fide holders of drafts drawn and or documents presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with. b. Confirmed Letter of Credit – whenever the beneficiary stipulates that the obligation of the opening bank shall also be made the obligation of another bank (also bank that notifies) to himself. c. Standby Letter of Credit – a security arrangement for the performance of certain obligations. It can be drawn against only if another business transaction is not performed. It may also be issued in lieu of a performance bond. *This type of letter of credit involves an obligation to do. *In Transfield v Luzon, the SC held that Luzon can ran after the Letter of Credit despite the pending arbitration of before the Commission because of the independence principle. *Upon default, the bank pay the beneficiary. d. Revolving Letter of Credit – one that provides for renewed credit to become available as soon as the opening bank has advised that the negotiating or paying

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

SECURITIES REGULATION CODE (R.A. 8799) SEC JURISDICTION: A. Powers and Functions of the Securities and Exchange Commission: Section 5 of RA 8799 states that: “The commission shall act with transparency and shall have the powers and functions provided by this code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses law, the Financing Company Act and other existing laws. Pursuant thereto the Commission shall have, among others, the following powers and functions: (a) Have jurisdiction and supervision over all corporations, partnership or associations who are the grantees of primary franchises and/or a license or a permit issued by the Government; (b) Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspect of the securities market and propose legislation and amendments thereto; (c) Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications; (d) Regulate, investigate or supervise the activities of persons to ensure compliance; (e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs; (f) Impose sanctions for the violation of laws and rules, regulations and orders, and issued pursuant thereto; (g) Prepare, approve, amend or repeal rules, regulations and orders, and issue

opinions and provide guidance on and supervise compliance with such rules, regulation and orders; (h) Enlist the aid and support of and/or deputized any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and function under its Code; (i) Issue cease and desist orders to prevent fraud or injury to the investing public; (j) Punish for the contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court; (k) Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision; (l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws; (m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnership or associations, upon any of the grounds provided by law; and (n) Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws. The Commission’s jurisdiction over all cases enumerated under section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over the cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payment/rehabilitation cases filed as of 30 June 2000 until finally disposed.” B. Cases transferred to the RTC: Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: (a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partnership, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder, partners, members of associations or organizations registered with the Commission; (b) Controversies arising out of intracorporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity; and (c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations, partnerships or associations. (d) Appointment of Rehabilitation Receiver or Management Committee. *Judico v Quiambao Q: How does the SRC protect the public who wishes to invest in securities? A: The law protects the public as follows: a. The law requires full disclosure of information to the public regarding the securities that are being offered and the issuers, including the filing of and approval of the registration statement and the approval of the prospectus. b. A continuing duty to regularly submit material information to the SEC. c. Close monitoring of the securities and other circumstances that may affect the same as well as the persons involved including brokers, issuers, the exchange

itself, etc. in order to ensure compliance with pertinent laws and regulations. d. Prohibiting and penalizing different fraudulent practices and transactions. e. Providing the SEC with powers and functions. Definition of terms: a. Securities – are share, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. It includes: a. shares of stocks, bonds, debentures, notes, evidences of indebtedness, assetbacked securities; b. investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription; c. fractional undivided interests in oil, gas or other mineral rights; d. derivatives like option and warrants; e. certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments; f. proprietary or non-proprietary membership certificates in corporations; and other instruments as may in the future be determined by the Commission. b. Issuer – is the originator, maker, obligor, or creator of the security. c. Broker – is a person engaged in the business of buying and selling securities for the account of others. d. Dealer – means any person who buys and sells securities for his/her own account in the ordinary course of business. e. Clearing Agency – is any person who acts as intermediary in making deliveries upon payment to effect settlement in securities transactions. f. Exchange – is an organized marketplace or facility that brings together buyers and sellers and executes trades of securities and/or commodities. g. Pre-Need Plans – are contracts which provide for the performance of future services or the payment of future monetary considerations at the time of actual need, for which planholders pay in cash or installment at stated prices, with or without interest or insurance coverage and includes life, pension, education, interment, and other plans which the Commission may from time to time approve. h. Promoter – is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefore.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro i.

j.

k. l.

m.

n.

o.

p. q. r.

s.

t.

u.

Prospectus – is the document made by or on behalf of an issuer, underwriter or dealer to sell or offer securities for sale to the public through a registration statement filed with the Commission. Registration statement – is the application for the registration of securities required to be filed with the Commission. Uncertificated security – is a security evidenced by electronic or similar records. Underwriter – is a person who guarantees on a firm commitment and/or declared best effort basis the distribution and sale of securities of any kind by another company. Investment contracts – a contract, transaction or scheme (collectively “contract”) whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. Derivatives – financial investment, including options and warrants whose value depends on the interest in or performance of an underlying security, but which does not require any investment of principal in the underlying security. Options – are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying security at a predetermined price, called the exercise or strike price, on or before a predetermined date, called the expiry date, which can only be extended in accordance with Exchange rules. Call options – are rights to buy. Put options – are rights to sell. Warrants – are rights to subscribe or purchase new shares or existing shares in a company, on or before a predetermined date, called the expiry date, which can only be extended in accordance with Exchange rules. Warrants generally have a longer exercise period than options. Commodity futures contract – means a contract providing for the making or taking delivery at a prescribed time in the future of a specific quantity and quality of a commodity or the cash value thereof, which is customarily offset prior to the delivery date, and includes standardized contracts having the indicia of commodities futures, commodity options and commodity leverage, or margin contracts. Commodity – means any goods, articles, services, rights and interests, including any group or index of any of the foregoing, in which commodity interests contracts are presently or in the future dealt in. Put – is a transferable option or offer to deliver a given number of shares of stock at a stated price at any given time during a stated period.

v. Call – is transferable option to buy a specified number of shares at a stated price. w. Straddle – is a combination put and call. x. Insider – means (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a person controlling the issuer; (c) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; (d) a government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (e) a person who learns such information by a communication from any of the foregoing insiders. y. Material non-public information – An information is “material non-public” if: (a) it has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security. *Q: When SEC can suspend or cancel certificate of registration? A: 1. Fraud in procuring registration; 2. Serious misrepresentation as to objectives of corporation; 3. Refusal to comply with lawful order of SEC; 4. Continuous inoperation for at least 5 years; 5. Failure to file by-laws within required period; 6. Failure to file reports; 7. Other similar grounds Basic rules regarding registration of securities: Sec. 8.1 of the Securities Regulation Code provides that: “Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.” Sec. 8.2 of the Securities Regulation Code states that: “The Commission may conditionally approve the registration statement under such terms as it may deem necessary.” Sec. 8.3 of the Securities Regulation Code states that: “The Commission may specify the terms and conditions under which any written communication, including any summary

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro prospectus, shall be deemed not to constitute an offer for sale under this Section.” Sec. 8.4 of the Securities Regulation Code states that: “A record of the registration of securities shall be kept in Register Securities in which shall be recorded orders entered by the Commission with respect such securities. Such register and all documents or information with the respect to the securities registered therein shall be open to public inspection at reasonable hours on business days. Sec. 8.5 of the Securities Regulation Code states that: “The Commission may audit the financial statements, assets and other information of firm applying for registration of its securities whenever it deems the same necessary to insure full disclosure or to protect the interest of the investors and the public in general.” *In approving the registration of the securities, the SEC is not only concerned with the requirement that full disclosure of information is given to the public. The SEC is also concerned with the merit of the securities themselves and the issuer. *Baviera v Paglinawan *There is no assurance on the part of the SEC that the securities presented are valid and good for investors. However, there is a penal sanction in case the securities are not what were disclosed. *Q: What securities are exempt from the requirement of registration? A: Sec. 9.1 of the Securities Regulation Code provides that: “The requirement of registration under Subsection 8.1 shall not as a general rule apply to any of the following classes of securities: (a) Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government. (b) Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That the Commission may require compliance with the form and content for disclosures the Commission may prescribe. (c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. (d) Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board, or the Bureau of Internal Revenue. (e) Any security issued by a bank except its own shares of stock.” Sec. 9.2 of the Securities Regulation Code provides that: “The Commission may, by rule or

regulation after public hearing, add foregoing any class of securities if it finds enforcement of this Code with respect securities is not necessary in the public and for the protection of investors.”

to the that the to such interest

*Reason: The issuer is a trusted and regulated officer. *Q: What transactions are exempt from the registration requirement under Securities Regulation Code? A: Sec. 10.1 of the Securities Regulation Code provides that: “The requirement of registration under Subsection 8.1 shall not apply to the sale of any security in any of the following transactions: (a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy. (b) By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provision of this Code, to liquidate a bonafide debt, a security pledged in good faith as security for such debt. (c) An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner therefore, or by his representative for the owner’s account, such sale or offer for sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transaction of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security. (d) The distribution by a corporation actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus. (e) The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock. (f) The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, when the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. (g) The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under this Code or was, when sold, exempt from the provision of this Code, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under this Code. Upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold. (h) Broker’s

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro transaction, executed upon customer’s orders, on any registered Exchange or other trading market. (i) Subscriptions for shares of the capitals stocks of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stocks under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscription is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized, capital increase. (j) The exchange of securities by the issuer with the existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. (k) The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period. (l) The sale of securities to any number of the following qualified buyers: (i) Bank; (ii) Registered investment house; (iii) Insurance company; (iv) Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or manage by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; (v) Investment company or; (vi) Such other person as the Commission may rule by determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management.” *Reasons: 1. Limited character of offering; 2. Mandated by law; 3. Stock dividends declared; 4. Transaction is such that registration of the securities is unwarranted. Sec. 10.2 of the Securities Regulation Code provides that: “The Commission may exempt other transactions, if it finds that the requirements of registration under this Code is not necessary in the public interest or for the protection of the investors such as by the reason of the small amount involved or the limited character of the public offering.” Sec. 10.3 of the Securities Regulation Code provides that: “Any person applying for an exemption under this Section, shall file with the Commission a notice identifying the exemption relied upon on such form and at such time as the Commission by the rule may prescribe and with such notice shall pay to the Commission fee equivalent to one-tenth (1/10) of one percent (1%) of the maximum value aggregate price or issued value of the securities.”

*Q: What are the grounds for revocation and/or rejection of the registration of securities/statement? A: Sec. 13.1 of the Securities Regulation Code provides that: “The Commission may reject a registration statement and refuse registration of the security there-under, or revoke the affectivity of a registration statement and the registration of the security there-under after the due notice and hearing by issuing an order to such effect, setting forth its finding in respect thereto, if it finds that: (a) The issuer: (i) Has been judicially declared insolvent; (ii) Has violated any of the provision of this Code, the rules promulgate pursuant thereto, or any order of the Commission of which the issuer has notice in connection with the offering for which a registration statement has been filed; (iii) Has been or is engaged or is about to engage in fraudulent transactions; (iv) Has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities; (v) Has failed to comply with any requirements that the Commission may impose as a condition for registration of the security for which the registration statement has been filed; or (b) The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue statements of a material fact required to be stated therein or necessary to make the statement therein not misleading; or (c) The issuer, any officer, director or controlling person performing similar functions, or any under writer has been convicted, by a competent judicial or administrative body, upon plea of guilty, or otherwise, of an offense involving moral turpitude and /or fraud or is enjoined or restrained by the Commission or other competent or administrative body for violations of securities, commodities, and other related laws.” Devices and practices on manipulation of security prices identified under the Securities Regulation Code: Sec. 24.1 of the Securities Regulation Code provides that: “It shall be unlawful for any person acting for himself or through a dealer or broker, directly or indirectly: (a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange of any other trading market (hereafter referred to purposes of this Chapter as "Exchange"): (i) By effecting any transaction in such security which involves no change in the beneficial ownership thereof; (ii) By entering an order or orders for the purchase or sale of such security with the knowledge that a simultaneous order or orders of substantially the same size, time and price, for the sale or purchase of any such security, has or will be entered by or for the same or different parties; or (iii) By performing similar act where there is no change in beneficial ownership. (b) To affect, alone or with others, a securities or transactions in securities that: (I) Raises their price to induce

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro the purchase of a security, whether of the same or a different class of the same issuer or of controlling, controlled, or commonly controlled company by others; or (iii) Creates active trading to induce such a purchase or sale through manipulative devices such as marking the close, painting the tape, squeezing the float, hype and dump, boiler room operations and such other similar devices. (c) To circulate or disseminate information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purpose of sale of such security. (d) To make false or misleading statement with respect to any material fact, which he knew or had reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange. (e) To effect, either alone or others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security; unless otherwise allowed by this Code or by rules of the Commission.” Sec. 24.2 of the Securities Regulation Code provides that: “No person shall use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance. Neither shall any short sale be effected nor any stop-loss order be executed in connection with the purchase or sale of any security except in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest for the protection of investors.” Acts that are considered unlawful with respect to the purchase and sale of securities: Sec. 26 of the Securities Regulation Code states that: “It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to: 1. Employ any device, scheme, or artifice to defraud; 2. Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or 3. Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person.” Duties of an insider in case of trading securities:

Sec. 27.1 of the Securities Regulation Code states that: “It shall be unlawful for an insider to sell or buy a security of the issuer, while in possession of material information with respect to the issuer or the security that is not generally available to the public, unless: (a) The insider proves that the information was not gained from such relationship; or (b) If the other party selling to or buying from the insider (or his agent) is identified, the insider proves: (I) that he disclosed the information to the other party, or (ii) that he had reason to believe that the other party otherwise is also in possession of the information. A purchase or sale of a security of the issuer made by an insider defined in Subsection 3.8, or such insider’s spouse or relatives by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to have been effected while in possession of material non-public information if transacted after such information came into existence but prior to dissemination of such information to the public and the lapse of a reasonable time for market to absorb such information: Provided, however, That this presumption shall be rebutted upon a showing by the purchaser or seller that he was aware of the material non-public information at the time of the purchase or sale.” *Q: What is the prohibition imposed on insiders regarding material non-public information? A: Sec. 27.3 of the Securities Regulation Code states that: “It shall be unlawful for any insider to communicate material non-public information about the issuer or the security to any person who, by virtue of the communication, becomes an insider as defined in Subsection 3.8, where the insider communicating the information knows or has reason to believe that such person will likely buy or sell a security of the issuer whole in possession of such information.” Tender Offer Sec. 19 of the Securities Regulation Code provides that: “Any person or group of persons acting in concert who intends to acquire at least 15% of any class of any equity security of a listed corporation of any class of any equity security of a corporation with assets of at least fifty million pesos (50,000,000.00) and having two hundred(200) or more stockholders at least one hundred shares each or who intends to acquire at least thirty percent(30%) of such equity over a period of twelve months(12) shall make a tender offer to stockholders by filling with the Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information required in Section 17 of this Code as the Commission may prescribe. Such person or group of persons shall publish all request or invitations or tender offer or requesting such tender offers subsequent to the initial solicitation or request shall contain such

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro information as the Commission may prescribe, and shall be filed with the Commission and sent to the issuer not alter than the time copies of such materials are first published or sent or given to security holders. (a) Any solicitation or recommendation to the holders of such a security to accept or reject a tender offer or request or invitation for tenders shall be made in accordance with such rules and regulations as may be prescribe. (b) Securities deposited pursuant to a tender offer or request or invitation for tenders may be withdrawn by or on behalf of the depositor at any time throughout the period that tender offer remains open and if the securities deposited have not been previously accepted for payment, and at any time after sixty (60) days from the date of the original tender offer to request or invitation, except as the Commission may otherwise prescribe. (c) Where the securities offered exceed that which person or group of persons is bound or willing to take up and pay for, the securities that are subject of the tender offers shall be taken up us nearly as may be pro data, disregarding fractions, according to the number of securities deposited to each depositor. The provision of this subject shall also apply to securities deposited within ten (10) days after notice of increase in the consideration offered to security holders, as described in paragraph (e) of this subsection, is first published or sent or given to security holders. (d) Where any person varies the terms of a tender offer or request or invitation for tenders before the expiration thereof by increasing the consideration offered to holders of such securities, such person shall pay the increased consideration to each security holder whose securities are taken up and paid for whether or not such securities have been taken up by such person before the variation of the tender offer or request or invitation.” *Cemco Holdings, Inc. v National Life Insurance, the SC held that tender offer rule is applicable in this case. Rationale: 1. The statute covers not only direct acquisition but also indirect acquisition or “any type of acquisition”; 2. The legislative intent of Sec. 19 of the Code is to regulate activities relating to acquisition of control of the listed company and for the purpose of protecting the minority stockholders of a listed corporation. Whatever may be the method by which control of a public company is obtained, either through the direct purchase of its stocks or through indirect means, mandatory tender offer rule applies. *Q: When is tender offer mandatory? A: It is mandatory when: 1. A person is required to make a tender offer for equity shares of a public company in an amount equal to the number of shares that the person intends to acquire in the following circumstances: a. Any person or a group of persons acting in concert, intends to acquire

35% or more of equity shares of a public company pursuant to an agreement made between or among the person and one or more sellers; b. The person or a group of persons acting in concert, intends to acquire 35% or more of the equity shares of a public company within a period of 12 months; c. If any acquisition of even less than 35% would result in ownership of over 51% of the total outstanding equity securities of a public company, the acquirer shall be required to make a tender offer for all the outstanding equity securities to all remaining stockholder. 2. In all cases when the rules provide for mandatory tender offer, the following rules on sales be complied with: a. If there is mandatory tender offer, the sale of the shares pursuant to the private transaction shall not be completed prior to the closing and completion of the tender offer. b. Transactions with any of the seller/s of significant blocks of shares with whom the acquirers may have been in private negotiations shall close at the same time and upon the same terms as the tender offer made to the public. c. For paragraph (b) above where the 35% is within a period of 12 months, the last sale meeting the threshold shall not be consummated until the closing and completion of the tender offer. *Q: When may the SEC exempt a person from the mandatory tender offer requirement? A: Upon written application, the SEC may exempt from the requirement to make a mandatory tender offer the following proposed purchases of equity shares of a public company: a. The purchase of newly issued shares from unissued capital stock b. In connection with foreclosure proceeding involving a duly constituted pledge or security arrangement where the acquisition is made by the debtor or creditor c. Purchases in connection with privatization undertaken by the government of the Philippines d. Purchases in connection with corporate rehabilitation under court supervision. *Q: When is a person presumed to be making voluntary tender offer? A: A person will be presumed to be making a voluntary tender offer where some or all of the following factors are present: a. Active and widespread solicitation of public shareholders for the shares of a public company

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro b. Solicitation made for a substantial percentage of the issuer’s stock c. Offer to purchase is made at a premium over the prevailing market price, at firm rather than negotiable terms d. An offer is contingent on the tender of a fixed number of shares; and/or e. Offer is only open for a limited period of time. Any person making a tender offer shall make a public announcement of his intention, prior to the commencement of the offer; Provided, however, such announcement shall not be made until the bidder has the resources to implement the offer in full.

NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) PRELIMINARY CONSIDERATIONS: A. Governing Laws 1. The Negotiable Instruments Law 2. The Code of Commerce 3. The New Civil Code B. Concept of Negotiable Instrument Negotiable Instruments is a written contract for the payment of the money which is intended as a substitute for

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro money and passes from one person to another as money, in such a manner as to give a holder in due course the right to hold the instrument free from defenses available to prior parties. C. Classes of Negotiable Instrument 1. Promissory Note Sec. 184 of the Negotiable Instruments Law provides that: “A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. Where a note is drawn to the maker’s own order, it is not complete until indorsed by him.” *Personal engagement on the part of the maker. 2. Bill of Exchange Sec. 126 of the Negotiable Instruments Law provides that: “A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer.” *There is only an order directing other party to pay the instrument. D. Functions of Negotiable Instrument 1. It operates as a substitute of money *This is the main function of negotiable instruments. *Either negotiable or non-negotiable instrument, it is a substitute for money. Both are in lieu of money. *relate this with legal tender 2. It is a means of creating and transferring credit 3. It facilitates the sale of goods 4. It increases the purchasing medium in circulation Q: Which one is the best or better substitute for money? Why? A: Negotiable instrument. Reasons: 1. Negotiability and 2. Accumulation of secondary contracts. E. Characteristics of Negotiable Instrument 1. Negotiability – it is that attribute or property whereby a bill or note or

check may pass from hand to hand similar to money, so as to give the holder in due course the right to hold the instrument and to collect the sum payable for himself free from defenses. *This attribute is very important. 2. Accumulation of secondary contracts – secondary contracts are picked up and carried along with them as they are negotiated from one person to another, or in the course of negotiation of a negotiable instrument, a series of juridical ties between the parties thereto arise either by law or by privity. *There must be further negotiation for secondary contracts exist. *Converted to obligors because of their indorsements F.

Negotiable Instruments compared with other papers (document of title, letter of credit, certificate of stock, pawn ticket, postal money order, treasury warrant) Document of title includes any bill of lading, dock warrant, quedan, or warehouse receipt or order for delivery of goods, or any other document used in the ordinary course of business in the sale or transfer of goods, as proof of possession or control of goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive either by indorsement or by delivery, goods represented by such document (Article 1636 of the New Civil Code) Letter of Credit is an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. Certificate of Stock is a non-negotiable instrument because it does not contain an unconditional promise or order to pay a sum certain in money. Pawn Ticket is a non-negotiable document because it does not represent money but the pawned articles. Postal Money Order is a non-negotiable instrument because it is governed by postal rules and regulations which may be inconsistent with the Negotiable Instruments Law and it can only be negotiated once. Treasury Warrant is a non-negotiable instrument because it is payable out of a particular fund.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

G. Legal tender character Q: Does negotiable instrument has legal tender power? A: NO. Q: What is legal tender? A: Legal tender is that kind of money that the law compels a creditor to accept in payment of his debt when tendered by the debtor in the right amount. *Coins/notes circulated by the Bangko Sentral ng Pilipinas. Q: What attribute that legal tender has that negotiable instrument do not have? A: Element of compulsion. FORM AND INTERPRETATION NEGOTIABLE INSTRUMENTS:

OF

A. Requisites of negotiability Sec. 1 of the Negotiable Instruments Law provides that: “An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (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 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.” Q: What principle do we follow in determining the instrument as negotiable or not? A: Negotiability is shown on the face of the instrument. Requisites: 1. Must be in writing and signed by the maker or drawer Q: Why should it be in writing? A: In order for the instrument to be used for negotiation. Rationale: For the achievement of the purpose of the negotiable instrument law. *It must be signed by the maker or drawer. Rationale: To be bound by the contract. 2. Must contain an unconditional promise or order to pay a sum certain in money Rationale why the law requires that the promise or order be unconditional: Because no one will accept the same if the transferee does not know the certainty of the event that will happen. Hence, uncertainty

will defeat the very purpose of the negotiable instrument law, i.e., substitute for money. *Mere recital does not negate negotiability of the instrument. Q: What is a condition? A: A contingent event, happening of which is uncertain, event which may or may not happen. *In alternative obligation, for negotiability purposes, the option must be left in the hands of the creditor for it to be negotiable. *If the option is left in the hands of the debtor, it is non-negotiable. a. Promise or order to pay must be unconditional i. Reference to transaction Sec. 3 of the Negotiable Instrument Law provides that: “An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with: (a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or (b) A statement of the transaction which gives rise to the instrument. But an order or promise to pay out of a particular fund is not unconditional.” ii. Source or payment or account to be debited Fund for Particular Reimburseme Fund for nt Payment The drawee There is only pays the payee one act – the from his own drawee pays funds directly from afterwards the the particular drawee pays fund indicated himself from the particular fund Particular fund Particular fund indicated is not indicated is the the direct direct source of source of payment payment *Particular fund for payment depends on the sufficiency of the funds

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *Extrinsic and collateral matter negates negotiability. b. Payable in sum certain in money i. Provisions which do not affect certainty of sum payable Sec. 2 of the Negotiable Instrument Law provides that: “The sum payable is a sum certain within the meaning of this Act, although it is to be paid: (a) With interest; or (b) By stated installments; or (c) By stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or (d) With exchange, whether at a fixed rate or at the current rate; or (e) With costs of collection or an attorney’s fee, in case payment shall not be made at maturity.” ii. Payment of interest Q: Why is there a need to pay interest? A: For the consumption of the money owned by a person but was not used by him. iii. Payment by installments Stated Installments – the dates of each installment must be fixed or at least determinable and the amount to be paid for each installment must be stated. Things to be written in the negotiable instrument regarding payment by installments: 1. Amount of each instalments *must be determinable 2. Maturity Date iv. Acceleration clause Acceleration clause renders whole debt due and demandable upon failure of the obligor to comply with certain conditions. *relate to doctrine of indivisibility of contract. v. Payment with exchange

*It must be the prevailing rate of conversion or fixed rate that is well known. *Does not affect the negotiability of the instrument because the sum remains certain. vi. Payment of attorney’s fees *Due to the default of the obligor, obligee was forced to engage the services of a lawyer. 3. Payable on demand or at a fixed or determinable future time a. When payable on demand Sec. 7 of the Negotiable Instruments Law provides that: “An instrument is payable on demand: (a) When it is so expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand.” *It is the holder of the instrument that has the call in case the negotiable instrument is silent, i.e., it stated no maturity date. b. When payable at determinable future time Sec. 4 of the Negotiable Instruments Law provides that: “An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable: (a) At a fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (c) On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect.” With Condition Uncertain happen

a to

With a Period Certain to happen though the date of

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro happening is uncertain *If the instrument is demandable based on period the negotiability of the instrument is still not affected. *Paragraph (c) is one with a period. 4. Payable to order or bearer *These are words of negotiability Q: What is the implication of these words? A: There is a proper authorization for further negotiation by the maker or drawer. a. When payable to bearer Sec. 9 of the Negotiable Instrument Law provides that: “The instrument is payable to bearer: (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or nonexisting person, and such fact was known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank.” Principle: Once a bearer always a bearer instrument. *This principle applies only to an instrument that was originally issued as bearer instrument. i. Rule when instrument is payable to a fictitious person *Upon its face, it is an order instrument but because it is named to fictitious or nonexisting person it is converted to a bearer instrument. *Fictitious person or nonexisting person cannot endorse. *The person to whose order the instrument is made payable may in fact be existing but he is still fictitious or non-existent under Sec. 9(c) of the negotiable instrument law if the person making it so payable does not intend to pay the specified person. b. When payable to order

*The payee of instrument payable to order must be a person in being, natural or legal, and ascertained at the time of issue. i. To whose order the instrument may be made payable Sec. 8 of the Negotiable Instrument Law provides that: “The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of: (a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or (d) Two or more payees jointly; or (e) One or some of several payees; or (f) The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty.”  A payee who is not maker, drawer, or drawee *The payee may be a juridical person. Q: How can it be negotiated further? A: By indorsement of the person authorized by the corporation.  The holder of an office for the time being *It is not necessary to name the person holding the position since it is payable to the office itself and not to the person holding it. 5. Omissions that do not affect negotiability Sec. 6 of the Negotiable Instrument Law provides that: “The validity and negotiable character of an instrument are not affected by the fact that: (a) it is not dated; or (b) does not specify the value given, or that any value had been given therefor; or (c) does not specify the place where it is drawn or

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro the place where it is payable; or (d) bears a seal; or (e) designates a particular kind of current money in which payment is to be made. But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument.”  Does not specify the value given or that any value had been given therefor *Consideration is always presumed. Basis: Sec. 24 of the Negotiable Instrument Law provides that: “Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.”  Does not specify the place where it is drawn or the place where it is payable *The New Civil Code is applied suppletorily.  Bears a seal *This is for authentication purposes.  A particular kind of current money in which payment is to be made *It is still negotiable because it would still be considered payable in money. Foreign currency is convertible to Philippine money which is legal tender in the Philippines. 6. Additional provisions not affecting negotiability Sec. 5 of the Negotiable Instrument Law provides that: “An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which: (a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or (b) authorizes a confession of judgment if the instrument be not paid at maturity; or (c) waives the benefit of any law intended for the advantage or protection of the obligor; or (d) gives the holder an election to require something to be done in lieu of payment of money. But nothing in this section shall validate any provision or stipulation otherwise illegal.” a. Sale of collateral securities

Q: Is the authority to sale includes the authority to appropriate for himself? A: NO. It constitutes pactum commissorium. It is an unjust enrichment. Q: What is the meaning of sale of collateral securities? A: Contemplates securities added to the obligation to pay. b. Confession of judgment *This is void by reason of public policy but still it is negotiable. *In effect, such provision is considered not existing. *It waives his right to due process; his right of a day in court. Case: PNB v Manila Oil Refinery c. Waiver of benefit *Pertains to benefits granted by the Negotiable Instrument Law. Q: What are the benefits that can be waived but the negotiability of the instrument is not affected? A: 1. Presentment for payment; 2. Notice of dishonor; 3. Protest d. Holder is given the option to do something in lieu of payment of money *If it is the obligor or debtor is given the option to choose what to be done it is not negotiable because it is conditional thus requisites for negotiability is not complied with. B. Rules to be followed in interpreting negotiable instruments Sec. 17 of the Negotiable Instrument Law provides that: “Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: (a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; (b) Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof; (c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued; (d) Where there is a conflict between the written and printed

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro provisions of the instrument, the written provisions prevail; (e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; (f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser; (g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon. “ *This rule is applicable only in case of ambiguity and there is doubt. NEGOTIATION: A. Modes of transfer 1. Negotiation – an instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. 2. Assignment – a method of transferring a non-negotiable instrument whereby the assignee is merely placed in the position of the assignor and acquires the instrument subject to all defenses that might have been set up against the original payee. *If the instrument is a non-negotiable the only transfer that can be made is by assignment. B. Concept of negotiation; distinguished from assignment Sec. 30 of the Negotiable Instrument Law provides that: “An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery.” Assignment Pertains to contracts in general Assignee takes the instrument subject to the defenses obtaining among the original parties Assignee steps into the shoes of the

Negotiation Pertains to negotiable instruments Holder in due course takes it free from personal defenses available among the parties Holder in due course may acquire

assignor and merely acquires whatever rights the assignor may have Governed by the Civil Code

a better right than the right of the transferor Governed by the Negotiable Instrument Law

C. Ways of negotiation (in case of order or bearer instrument) 1. If payable to bearer, it is negotiated by mere delivery 2. If payable to order, it is negotiated by indorsement and delivery Q: Why can’t indorsement be avoided by original payee? A: Because by indorsement, it is the original payee’s order to the maker to pay the transferee. Q: Why indorsement is not necessary in bearer instrument? A: Because the engagement is to pay the amount of the instrument to holder or to any subsequent holders. Q: If the instrument is originally issued as an order instrument and was subsequently negotiated, does it always require indorsement and delivery? A: IT DEPENDS. If the indorsement is special, it is necessary that there is indorsement and delivery, however, if the indorsement is blank, delivery alone is sufficient. D. Concept of delivery Sec. 16 of the Negotiable Instrument Law provides that: “Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.” Delivery is the transfer of possession of the instrument by the maker or drawer with the intention to transfer title to the payee and recognize him as holder thereof. *Delivery is always a common requirement. E. Indorsement 1. Concept Indorsement is a legal transaction effected by the writing of one’s name at the back of the instrument or upon a paper (allonge) attached thereto with or without additional words specifying the person whom or to whose order the instrument is to be payable whereby one not only transfers legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid. *This is a mechanical act 2. How made Sec. 31 of the Negotiable Instrument Law provides that: “The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement.” Sec. 32 of the Negotiable Instrument Law provides that: “The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue.” 3. Kinds *These words: specified, restrictive, conditional, qualified are associated words; they can be used interchangeably.  How further negotiation of an order instrument be made: a. Special Sec. 34 of the Negotiable Instrument Law provides that: “A special indorsement specifies the

person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery.” *In special indorsement, indorsement and delivery is necessary. Example: FFr

Front

(Back) Pay to C

b. Blank Sec. 35 of the Negotiable Instrument Law provides that: “The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement.” *In blank indorsement, only delivery is necessary. Example” Back

Front

(Back)

 When is the indorsement effective: a. Conditional Sgd B Sec. 39 of the Negotiable Instrument Law provides that: “Where an indorsement is conditional, the party required to pay the instrument may disregard the condition and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally.” Q: What is suspended? A: The very indorsement is suspended thus the right of the indorsee is made to depend on the happening of the event. Example: A → B ----› C b. Unconditional  What are the liabilities of an indorser:

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro a. Qualified Sec. 38 of the Negotiable Instrument Law provides that: “A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument.” *This indorsement is confined to warranties. *In this kind of indorsement, Sec. 65 of the Negotiable Instrument is applicable. b. Unqualified *Indorsement of this kind makes the indorsee liable for warranties and held the indorsee secondarily liable in case of dishonor. *Sec. 66 of the Negotiable Instrument Law is applicable in this kind of consideration.  What are the rights of indorsee: a. Restrictive Sec. 36 of the Negotiable Instrument Law provides that: “An indorsement is restrictive which either: (a) Prohibits the further negotiation of the instrument; or (b) Constitutes the indorsee the agent of the indorser; or (c) Vests the title in the indorsee in trust for or to the use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement restrictive.” *Prohibits the further negotiation of the instrument - the beneficial and legal title is both on the indorser. *Constitutes the indorsee the agent of the indorser - the indorser has the legal title while the beneficial title remains with the principal. -the relationship exists here is principal-agent relationship. *Vests the title in the indorsee in trust for or to the use of some other persons -the beneficial title belongs to other person whereas the legal title remains with the beneficiary.

-The relationship exists is a trusteetrustor relationship. Sec. 37 of the Negotiable Instrument Law provides that: “A restrictive indorsement confers upon the indorsee the right: (a) to receive payment of the instrument; (b) to bring any action thereon that the indorser could bring; (c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement.” *It does not follow that if the instrument is restrictively indorsed the liability is qualified. b. Unrestrictive 4. Other rules on indorsement a. in a representative capacity Sec. 44 of the Negotiable Instrument Law provides that: “Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability.” b. Presumption as to time of indorsement Sec. 45 of the Negotiable Instrument Law provides that: “Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue.” c. Place of indorsement Sec. 46 of the Negotiable Instrument Law provides that: “Except where the contrary appears, every indorsement is presumed prima facie to have been made at the place where the instrument is dated.” d. Striking out of indorsement Sec. 48 of the Negotiable Instrument Law states that: “The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument.”

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *The striking of indorsement is under the discretion of the holder and not of the indorser. e. Transfer indorsement of an instrument payable to bearer Sec. 40 of the Negotiable Instrument Law states that: “Where an instrument, payable to bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title through his indorsement.” Example: Note payable to bearer A → B → C → D B indorsed the instrument to C Q: Does the indorsement affect the instrument? A: NO. Even if there is an indorsement, it does not change the fact that the instrument is a bearer one thus it can be negotiated by mere delivery. Q: Is the indorser of the bearer instrument liable? What is his liability? A: YES. He is liable in case of breach of warranty. He is liable as indorser for the fact that he indorses a bearer instrument. *Indorsement on a bearer instrument does not affect the nature of the instrument because a bearer instrument is always a bearer instrument. *This section applies only to instruments which are originally payable to bearer. Example: A issued to B a bearer note, B wants to negotiate it to C. B asked you how he can validly negotiate the bearer instrument? The answer is by mere delivery. Q: Is there a change in the liabilities of a person who indorses a bearer instrument? A: YES. He is liable as an indorser under Sec. 67 of the Negotiable Instrument Law. Q: Is there any liability attaches to the person who negotiates the instrument by mere delivery? A: YES. Sec 65 second paragraph but confined to warranties only. f. Where instrument is payable to 2 or more persons

Sec. 41 of the Negotiable Instrument Law states that: “Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others.” g. Instrument is drawn or indorsed to a person as cashier Sec. 42 of the Negotiable Instrument Law states that: “Where an instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the officer.” h. Where name of payee or indorsee is misspelled Sec. 43 of the Negotiable Instrument Law states that: “Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper signature.” i. Indorsement of an order of instrument without indorsement Sec. 49 of the Negotiable Instrument Law provides that: “Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made.” Q: A issued an instrument payable to the order of B, B wants to negotiate it to C. How negotiation be validly made? A: Indorsement and delivery Q: A issued an order instrument to B, B transferred it to C only by delivery without indorsing it. Is

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro there any legal implication on the gesture made by B? A: YES. Under Sec. 49 of the Negotiable Instrument, there is an equitable assignment. Q: Does the holder of the instrument has any other right? A: YES. He has the right to have the indorsement of the transferor. This right is applicable only if the instrument is negotiable. He can file a case for specific performance. Q: Why is the date of indorsement material? A: To determine the date of due course holding. Q: A issued a negotiable instrument to B, B negotiated it to C. The delivery took effect on May 1, 2008 and the indorsement took effect on June 1, 2008. When was there a valid negotiation? A: At the time indorsement was made. There is no retroactive effect. *The requisites of a holder in due course must be present up to the actual and valid negotiation took place. 5. Negotiation by a prior party Sec. 50 of the Negotiable Instrument Law states that: “Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act, reissue and further negotiable the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable.” HOLDERS: A. General concept of holder Sec. 191 of the Negotiable Instrument Law states that: “"Holder" means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.” *If payable to bearer, “holder” means the person who is in possession thereof. Q: Can a named payee be called a holder? A: YES. If the instrument is in his possession. Presumption: There was a valid delivery. Advantage of being a holder in due course: Can give shelter/protection to the subsequent holders. B. Holder in due course

Sec. 52 of the Negotiable Instrument Law provides that: “A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.” *Requisites on Sec. 52 boils down to good faith and innocence of the holder. *This is equivalent to innocent buyer in good faith under New Civil Code. 1. Instrument complete and regular *Complete: all necessary details that define the necessary rights thereto and all the requisites of Sec. 1 must be present. *Regular: there must be no visible alterations/changes upon the face of the instrument. *These are alterations that are obvious in the naked eye. 2. Taken before overdue *If the instrument is overdue, it is also a notice that it has been dishonored. *An instrument is overdue after the date of maturity. *It is very unusual to negotiate an instrument that has been matured because such instrument should have been discharged. a. Rule in case of installment instruments *When the instrument contains an acceleration clause, knowledge of the holder at the time of acquisition thereof that one installment or interest, or both, as the case may be, is unpaid, is notice that the instrument is overdue. *One who purchases in good faith an instrument upon which the interest is overdue is a holder in due course. But where, by the terms of the instrument, the principal was to become due upon default of the payment of interest, one who takes the instrument upon which the interest is overdue is not a holder in due course.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro b. Rule in case of demand instruments Sec. 53 of the Negotiable Instrument Law provides that: “Where an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course.” *In demand instrument, reasonableness test is applied. It is the usage of trade or business practice (if any), with respect to such instruments, and the facts of the particular case. 3. Notice of infirmity or defect Sec. 54 of the Negotiable Instrument Law provides that: “Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount therefore paid by him.” *There is defective in the title when there is error in the indorsement and/or in delivery. Q: Even if the instrument suffer infirmities, is there a possibility that the holder be a holder in due course? A: YES. If he has no knowledge of the infirmity. Sec. 55 of the Negotiable Instrument Law provides that: “The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud.” Q: What are the circumstances that render title defective? A: When he obtained the instrument or any signature thereto by: 1. Fraud; 2. Duress; 3. Force and fear; 4. Other unlawful means; 5. For an illegal consideration; 6. Negotiate it in breach of faith; and 7. Under such circumstances as amount to a fraud. Example: A → B → C

On the part of A, the issuance of the instrument is involuntary because of the presence of any circumstances mentioned in Sec. 55. thus making B’s title defective. Q: Can C still be called a holder in due course? A: YES. As long as he has no knowledge of the defect in the title of the person negotiating it to him. Sec. 56 of the Negotiable Instrument Law provides that: “To constitutes notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.” *Infirmities must include things that are wrong with the instrument itself. These are infirmities not visible to the naked eye. *As long as he has knowledge of the infirmity due course holding is not present. Q: How can we reconcile the 1 st requirement and the 4th requirement? A: The first requirement pertains to infirmities visible to the naked eye whereas the fourth requirement pertains to infirmities not visible to the naked eye. Example: The instrument contains

all necessary details except for the amount, A instructed B to fill the instrument of the any amount but upto P50,000 only. B inserted P80,000. B negotiated it to C. Q: Can C detect the infirmity upon its face? A: NO 4. Good faith 5. Holder for value C. Presumption of due course holding Sec. 59 of the Negotiable Instrument Law provides that: “Every holder is deemed prima facie to be a holder in due

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title.” *The presumption expressed in this section arises only in favor of a person who is a holder in the sense defined in Sec. 191 of the Negotiable Instrument Law, i. e., a payee or indorsee who is in possession of the draft, or the bearer thereof. Q: How important is the statutory presumption? A: The holder of the instrument need not prove that he is a holder in due course. *The burden to prove shifted to the other party. D. Rights of holders in due course Sec. 57 of the Negotiable Instrument Law provides that: “A holder in due course holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon.” E. Shelter Rule Sec. 58 of the Negotiable Instrument Law provides that: “In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were nonnegotiable. But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.” Requisites: 1. That the holder derived his title from a holder in due course. 2. That he himself is not a party to any fraud or illegality affecting the instrument. Example: A → B → C → D → E → F E is a holder in due course E negotiated the instrument to F who is not a holder in due course.

To subsequent holder, F is considered to be a holder in due course because he was sheltered by E who is a holder in due course. *The determination of whether there is due course holding or not is material only when there is a personal defense. Q: Is it worth comparing the holders in due course and the one who derived title from the holder in due course? A: YES. Advantages: Holder in due course

A person derived title from a holder in due course Holder in due course to all prior parties except to the person who negotiated the instrument to him

Always a holder in due course to all prior parties. Always with freedom against defenses and defective title Shelter rule is Shelter rule is not applicable applicable General Rule: Equitable defenses can be interposed against a person not a holder in due course. Exception: Shelter rule, i. e., Section 58 of the Negotiable Instrument Law. LIABILITY OF PARTIES: Q: What is your understanding of parties liable? When do you say a party is liable? A: A person is liable when he in obligated to perform a particular prestation. Q: What are the liabilities of the parties according to its nature? A: 1. Warranties; 2. Engagement to pay ( primary; secondary) A. Primary and distinguished Distinction: Primary Liability The engagement of a party to an instrument that on its due date he will accept or pay, or both, the instrument to the payee or to any one to whom it is negotiated according to its tenor.

secondary

liability,

Secondary Liability An engagement by a party to an instrument that on its due presentment it shall be accepted or paid or both as the case may be according to its tenor and that if it be dishonored and the necessary proceedings on dishonor be duly

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro taken he will pay the amount thereof to the payee or to whom it is negotiated or to any subsequent indorser who may be compelled to pay it. Conditionally liable

Absolutely liable

B. Liability distinguished from warranty Warranty consists of a party’s undertaking that at the time of his negotiation he had title to the instrument and it is valid and subsisting. -This is an affirmation/assertion/admission that certain things are true. Q: Are all parties had warranties? A: YES. Q: Is engagement to pay common to all parties? A: NO. Distinction: Liability It is material to determine whether the person is primarily or secondarily liable

Warranties It is immaterial to know whether the person is primarily or secondarily liable

C. Liability and/or warranty of parties Liability in general a. Warranty b. Engagement to pay Promissory Note Maker General Indorser

Bill of Exchange Primary Acceptor Secondary General Indorser and drawer *If the holder’s cause of action is primary engagement, due presentment and dishonor proceedings are irrelevant. *If the holder’s cause of action is breach of warranty, due presentment and dishonor proceedings are irrelevant. *If the holder’s cause of action is secondary engagement to pay, due presentment and dishonor proceedings are relevant. Q: Is liability on warranties common to all? A: YES. Persons that had no engagement to pay: 1. Qualified Indorsers 2. Persons negotiating by delivery

Promissory Note Maker (Sec. 60)

Bill of Exchange Drawer (Sec. 61) Acceptor (Sec. 62) Indorser a. General b. Qualified

Indorser a. General (Sec. 66) b. Qualified (Sec. 65) Persons Persons negotiating by negotiating by delivery (Sec. delivery 65) Q: Can the drawee be forced to be held liable? A: NO. As long as he do not accepts the instrument. *The drawee cannot be compelled to accept the negotiable instrument. *If the refusal amounted to tortious act, the drawee may be held liable but not based on contract. 1. Maker Sec. 60 of the Negotiable Instrument Law provides that: “The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse.” *Maker is primarily liable 2. Drawer Sec. 61 of the Negotiable Instrument Law provides that: “The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder.” *Due presentment means not only any presentment but presentment in accordance with law. *Necessary proceedings on dishonor means proceedings must be one within accordance with law. *Drawer is conditionally liable a. Relationship with drawee

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro b. Relationship with collecting bank 3. Acceptor Sec. 62 of the Negotiable Instrument Law states that: “The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits: (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse.” *Acceptor is primarily liable Sec. 127 of the Negotiable Instrument Law states that: “A bill of itself does not operate as an assignment of the funds in the hands of the drawee available for the payment thereof, and the drawee is not liable on the bill unless and until he accepts the same.” 4. Indorsers a. General indorsers Sec. 66 of the Negotiable Instrument Law states that: “Every indorser who indorses without qualification, warrants to all subsequent holders in due course: (a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and (b) That the instrument is, at the time of his indorsement, valid and subsisting; And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.” *General indorsers are liable for warranties and they are secondarily liable for engagement to pay. b. Qualified indorsers Sec. 65 of the Negotiable Instrument Law states that: “Every person negotiating an instrument by delivery or by a qualified indorsement warrants: (a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to

it; (c) That all prior parties had capacity to contract; (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes.” *Qualified indorsers are liable for warranties c. Order of liability Sec. 68 of the Negotiable Instrument Law states that: “As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally.” 5. Parties negotiating by mere delivery Sec. 65 of the Negotiable Instrument Law provides that: “Every person negotiating an instrument by delivery or by a qualified indorsement warrants: (a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to it; (c) That all prior parties had capacity to contract; (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes.” 6. Other cases a. Irregular indorser Sec. 64 of the Negotiable Instrument Law states that: “Where a person, not otherwise a party to an instrument, places thereon his signature in blank

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro before delivery, he is liable as indorser, in accordance with the following rules: (a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. (b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer. (c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.” b. Indorser of bearer instrument Sec. 67 of the Negotiable Instrument Law provides that: “Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser.” c. Accommodation party Sec. 29 of the Negotiable Instrument Law states that: “An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party.” *The liability of an accommodation party depends on how they participate in the instrument. d. Agents signing in behalf of the principal Sec. 19 of the Negotiable Instrument Law provides that: “The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent may be established as in other cases of agency.” DEFENSES: A. Real and Personal Defenses, distinguished Distinctions: Real Defense

Personal Defense

Stronger defense Those that attach to the instrument itself and are available against all holders, whether in due course or not but only by the parties entitled to raise them (Absolute defense) Cannot be enforced by the holder because there is no contract to enforce

Weakest defense Those which are available only against a person not a holder in due course or a subsequent holder who stands in privity with him (Equitable defense) Can be enforced because there is an existing contract but subject to defense The following are The following are real defenses: personal defences: 1. Material 1. Absence or alteration failure of 2. Want of consideratio delivery of n incomplete 2. Want of instrument delivery of 3. Duress complete amounting instrument to forgery 3. Insertion of 4. Fraud in wrong date factum or in an fraud in esse instrument contractus 4. Filling up of 5. Minority blank 6. Insanity contrary to 7. Ultra vires authority acts of a given or not corporation within 8. Want of reasonable authority of time agent 5. Fraud in 9. Illegality inducement 10. Forgery 6. Duress or 11. Prescription fear 7. Illegal consideratio n 8. Negotiation in breach of faith 9. Mistake 10. Ante-dating or post dating for illegal or fraudulent purposes 11. Abuse of authority 12. Conditional delivery of complete instrument Q: In a creditor-debtor relationship, who is interested in the existence of a defense?

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro A: Debtor. Reason: Presence of a defense exonerate the liability of the debtor. Kinds: 1. Real defense 2. Personal defense Q: Why are real defenses stronger than the personal defense? A: Because there is no contract exists on his part. B. Real defenses 1. Minority and ultra vires acts (Sec 22) Sec. 22 of the Negotiable Instrument Law provides that: “The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon.” Examples: a. A, a minor, issued a promissory note to B; B negotiated it to C; C to D then D to E. Q: What defense is available to A? A: Minority Q: Why is it a real defense? A: Because of his lack of capacity. Q: What recourse is available to the holder? A: Go after the indorsers b. A issued a negotiable instrument to B, a minor. Q: Can A use minority as a defense? A: NO. As maker, he admits the existence of the payee and his then capacity to indorse. 2. Non-delivery of an incomplete instrument Sec. 15 of the Negotiable Instrument Law provides that: “Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery.” 3. Fraud in factum *The person who signs the instrument lacks knowledge of the character or essential terms of the instrument. But the defense is not available if the party involved had reasonable opportunity to obtain such knowledge. 4. Forgery and want of authority Sec. 23 of the Negotiable Instrument Law provides that: “When a signature is forged or made

without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.” *What is inoperative is only the signature and not the instrument. Parties precluded from raising forgery as defense: 1. Person negotiating by delivery 2. Prior parties/indorsers a. Forgery of maker’s signature *Maker cannot be held liable by any holder. Reason: The purported maker is not a party to the instrument as his forged instrument is inoperative and no right to retain, enforce or discharge the note may be acquired against him. b. Of indorser’s signature *The indorsement is inoperative thus it cannot effect any transfer of any rights to the holder. Example: A (maker) → B → C → D → E B’s signature was forged Q: Can A raise the defense of Forgery? A: YES. Q: Can E go after B? A: NO. Recourse: Go after C or D *Cut-off rule is applicable. Indorsement is necessary for the transfer of title. Example: X→A→B→C→D→E Q: Can the acceptor admits the genuineness of the signature of the payee? A: NO. Q: Can a drawee refuse payment of a bill of exchange bearing a forged indorsement? A: YES. Cut-off rule applies Cases: Associated Bank v CA; PNB v CA; Republic v Ebrada c. Of drawer’s signature *In cases involving a forged check, where the drawer’s signature is forged, the drawer can recover from the drawee bank. No drawee

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro bank has a right to pay a forged check. If it does, it shall have to recredit the amount of the check to the account of the drawer. Reason: The drawee bank is bound to know the signature of the drawer since the drawer is its customer. Example: X → A (drawer) → B → C → D → E (holder) Drawer’s signature was forged Q: Can drawee accept a bill of exchange bearing forged signature of the drawer? A: NO. Q: What is the implication of accepting bill of exchange bearing a forged signature of the drawer? A: Sec. 62 of the Negotiable Instrument Law. Once accepted, drawee cannot raise forgery as a defense. Recourse: Go after the last holder/collecting bank. *Collecting bank assumes the role of an indorser. Case: Gempesaw v CA *Cut-off rule is not applicable General Rule: Drawee bank is liable for the loss. Exception: There is fault/negligence on the part of the drawer d. Forgery of bearer instruments *In bearer instruments, the signature of the payee or holder is unnecessary to pass title to the instrument. Hence, where the indorsement is a forgery, only the person whose signature is forged can raise the defense of forgery against a holder in due course. 5. Material alteration (partial real defense) Sec. 124 of the Negotiable Instrument Law provides that: “Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers. But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce

payment thereof according to its original tenor.” Q: Why is this a partial defense only? A: Because the holder in due course may still demand payment but according to its original tenor. Sec. 125 of the Negotiable Instrument Law states that: “Any alteration which changes: (a) The date; (b) The sum payable, either for principal or interest; (c) The time or place of payment: (d) The number or the relations of the parties; (e) The medium or currency in which payment is to be made; (f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration.” *The underlined phrase is what we call “catch-all clause” Q: What is the condition/term of the instrument at the time it was altered? A: The instrument is materially complete. 6. Extinctive prescription C. Personal defenses *Determination of whether the person is a holder in due course or not is material. Q: Why this defense is treated as a weak defense? A: Because only holders not in due course can raise these defenses. 1. Ante-dating or post dating Sec. 12 of the Negotiable Instrument Law provides that: “The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery.” 2. Insertion of wrong date Sec. 13 of the Negotiable Instrument Law provides that: “Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date.” Principle: One who made possible to the infirmity shall bear the loss Example:

*It is inequitable for a person to set up this defense against more innocent party. Q: Is there any recourse to the holder? A: YES. To ran against the indorsers *Subsequent indorsers cannot put up the defense of good faith. Example:

The amount _______ The true date is June 1, 2008 maturity 10 days after date will be June 11, 2008 The date inserted is May 25, 2008 the maturity date will be June 4, 2008 A→B→C→D→E If E is a holder in due course and A is the maker, though both E and A are innocent, A shall suffer the consequence for he made possible to the loss If E is not a holder in due course and A is the maker, E is not innocent but A is innocent thus E cannot held A liable. 3. Filling up blanks beyond authority (Abuse of Authority) Sec. 14 of the Negotiable Instrument Law states that: “Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.”

The is authority to fill the amount is upto P50,000 only ___________ A→B→C→D→E B inserted an amount of P80,000 Q: Is there a defense? A: YES. Q: Can it be used? A: IT DEPENDS. Depending whether the holder is a holder in due course or not. *If holder in due course the defense cannot be raised. *If holder not in due course he can use it as a defense. Reason: The holder not in due course is not an innocent party as far as the maker is concern thus the contract is avoided. Recourse: Go after the immediate transferor in case of bearer instrument or the indorsers in case of order instrument. 4. Want of delivery of a complete instrument Sec. 16 of the Negotiable Instrument Law states that: “Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.” Example: A issued a complete instrument but he has no intention of negotiating it yet B got the instrument accidentally B negotiated it to C then C to D and D to E E is a holder in due course Q: Can C be a holder in due course? A: YES. As long as he has no knowledge of the infirmity Q: Between E and A, can A raise the defense? A: NO. Because the defense is a personal defense. Principle: One who makes the infirmity possible shall bear the loss. Recourse: Go after the indorsers Reason: Breach of warranty, i.e., that they had good title to the instrument. 5. Absence or failure of consideration Sec. 28 of the Negotiable Instrument Law provides that: “Absence or failure of consideration is a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise.” *Defense pro tanto means that the person is not totally exonerated from liability; he is liable upto the amount he benefited. *Partial failure of consideration is a personal defense and can be raised against a holder not in due course. *The general indorser is liable for breach of warranty, i.e., his warranty that at the time of his indorsement the instrument is valid and existing. *With regard to person negotiating by delivery and qualified indorser, his liability depends on whether or not he has knowledge of the invalidity of the instrument. Example: A issued a promissory note sans consideration to B. Q: Can B collect to A? A: NO. B indorsed the note to C then C to D and D to E. Q: Could C be a holder in due course?

A: YES. As long as he has no knowledge of the fact that there was infirmity in the instrument. Q: Is a defense exists in favor of A? What kind of defense? A: YES. It is a personal defense Q: Can A successfully raise it? Why? A: NO. One who made the infirmity possible shall bear the loss. 6. Simple fraud, duress, intimidation, force or fear, illegality of consideration, breach of faith Sec. 55 of the Negotiable Instrument Law provides that: “The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud.” Sec. 56 of the Negotiable Instrument Law states that: “To constitutes notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.” Sec. 57 of the Negotiable Instrument Law provides that: “A holder in due course holds the instrument free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon.” ENFORCEMENT OF LIABILITY: A. Parties primarily secondarily liable Primarily Liable Maker Acceptor

liable

and

parties

Secondarily Liable Drawer General Indorsers Qualified Indorsers

B. General steps in enforcing liability 1. Presentment 2. Dishonor  Promissory Note

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 1. Presentment for payment must be made within the required period to the maker (Sec. 70) 2. Notice of Dishonor (Sec. 89) Example: M→A→B→C→D→E Q: In a case where the cause of action is for payment, is presentment and dishonor essential? A: YES. Q: If the holder is running after the indorsement for breach of warranty, is presentment and dishonour essential? A: NO.  Bill of Exchange 1. Presentment for acceptance or negotiation within a reasonable time after it was acquired (Sec. 143) 2. If dishonored by non-acceptance: 2.1. Notice of dishonor should be given to the indorsers and drawer 2.2. If the bill is a foreign bill, there must be a protest for dishonor by non-acceptance 3. If the bill is accepted: 3.1. Presentment for payment to the acceptor should be made 3.2. If the bill is dishonored upon presentment for payment: 3.2.1. Notice of dishonor upon presentment for payment 3.2.2. If the bill is a foreign bill, protest for dishonor by non-acceptance must be made C. Presentment for payment 1. Concept of presentment Presentment is the production of a bill of exchange to the drawee for his acceptance or to the drawee or acceptor for payment or the production of a promissory note to the party liable for the payment of the same. 2. Requisites for sufficiency Sec. 72 of the Negotiable Instrument Law provides that: “Presentment for payment, to be sufficient, must be made: (a) By the holder, or by some person authorized to receive payment on his behalf; (b) At a reasonable hour on a business day; (c) At a proper place as herein defined; (d) To the person primarily

liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made.” a. Date of presentment Sec. 71 of the Negotiable Instrument Law states that: “Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it is payable on demand, presentment must be made within a reasonable time after its issue, except that in the case of a bill of exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotiation thereof.” i. Rule in determining maturity date Sec. 85 of the Negotiable Instrument Law provides that: “Every negotiable instrument is payable at the time fixed therein without grace. When the day of maturity falls upon Sunday or a holiday, the instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day except that instruments payable on demand may, at the option of the holder, be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday.” ii. Rule in computing time Sec. 86 of the Negotiable Instrument Law provides that: “When the instrument is payable at a fixed period after date, after sight, or after that happening of a specified event, the time of payment is determined by excluding the day from which the time is to begin to run, and by including the date of payment.” iii. Rule in if payable at a bank

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Sec. 75 of the Negotiable Instrument Law states that: “Where the instrument is payable at a bank, presentment for payment must be made during banking hours, unless the person to make payment has no funds there to meet it at any time during the day, in which case presentment at any hour before the bank is closed on that day is sufficient.” b. Place of presentment Sec. 73 of the Negotiable Instrument Law provides that: “Presentment for payment is made at the proper place: (a) Where a place of payment is specified in the instrument and it is there presented; (b) Where no place of payment is specified but the address of the person to make payment is given in the instrument and it is there presented; (c) Where no place of payment is specified and no address is given and the instrument is presented at the usual place of business or residence of the person to make payment; (d) In any other case if presented to the person to make payment wherever he can be found, or if presented at his last known place of business or residence.” i. Rule in if payable at a special place Sec. 70 of the Negotiable Instrument Law states that: “Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the instrument is, by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except as herein otherwise provided, presentment for payment is necessary in

order to charge the drawer and indorsers.” c. Presentment to the party primarily liable i. How presentment made Sec. 74 of the Negotiable Instrument Law states that: “The instrument must be exhibited to the person from whom payment is demanded, and when it is paid, must be delivered up to the party paying it.” ii. Rule in case party primarily liable is already dead Sec. 76 of the Negotiable Instrument Law states that: “Where the person primarily liable on the instrument is dead and no place of payment is specified, presentment for payment must be made to his personal representative, if such there be, and if, with the exercise of reasonable diligence, he can be found.” iii. Presentment to partners Sec. 77 of the Negotiable Instrument Law provides that: “Where the persons primarily liable on the instrument are liable as partners and no place of payment is specified, presentment for payment may be made to any one of them, even though there has been a dissolution of the firm.” iv. Presentment to joint debtors Sec. 78 of the Negotiable Instrument Law states that: “Where there are several persons, not partners, primarily liable on the instrument and no place of payment is specified, presentment must be made to them all.” 3. Instances where presentment is excused Sec. 79 of the Negotiable Instrument Law provides that: “Presentment for payment is not required in order to charge the drawer where he has no right to expect or

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro require that the drawee or acceptor will pay the instrument.” Sec. 80 of the Negotiable Instrument Law states that: “Presentment is not required in order to charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented.” Sec. 82 of the Negotiable Instrument Law states that: “Presentment for payment is excused: (a) Where, after the exercise of reasonable diligence, presentment, as required by this Act, cannot be made; (b) Where the drawee is a fictitious person; (c) By waiver of presentment, express or implied.” 4. When delay in presentment excused Sec. 81 of the Negotiable Instrument Law provides that: “Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, presentment must be made with reasonable diligence.” D. Notice of dishonor 1. When dishonor of the instrument occurs: a. Dishonor by non-payment Sec. 83 of the Negotiable Instrument Law states that: “The instrument is dishonored by nonpayment 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.” Q: What are the implications of the notices sent to drawer/general indorsers? A: Secondary liability Example: A→B→C→D→E E sent notice of dishonor to D alone Q: What is the effect of notice given to D? A: Others are discharge. Principle: Parties not given a notice are discharge. b. Dishonor by non-acceptance Sec. 149 of the Negotiable Instrument Law provides that: “A

bill is dishonored by nonacceptance: (a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or can not be obtained; or (b) When presentment for acceptance is excused and the bill is not accepted.” 2. Who should give notice a. Holder Sec. 90 of the Negotiable Instrument Law provides that: “The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given.” b. Agent Sec. 91 of the Negotiable Instrument Law states that: “Notice of dishonor may be given by any agent either in his own name or in the name of any party entitled to given notice, whether that party be his principal or not.” c. Party who may be compelled to pay Sec. 90 of the Negotiable Instrument Law provides that: “The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given.” 3. Form of Notice Sec. 96 of the Negotiable Instrument Law states that: “The notice may be in writing or merely oral and may be given in any terms which sufficiently identify the instrument, and indicate that it has been dishonored by non-acceptance or nonpayment. It may in all cases be given by delivering it personally or through the mails.” 4. To whom notice is given a. Party secondarily liable or agent Sec. 97 of the Negotiable Instrument Law provides that: “Notice of dishonor may be given

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro either to the party himself or to his agent in that behalf.” b. Notice where party is dead Sec. 98 of the Negotiable Instrument Law states that: “When any party is dead and his death is known to the party giving notice, the notice must be given to a personal representative, if there be one, and if with reasonable diligence, he can be found. If there be no personal representative, notice may be sent to the last residence or last place of business of the deceased.” c. Notice to partners Sec. 99 of the Negotiable Instrument Law provides that: “Where the parties to be notified are partners, notice to any one partner is notice to the firm, even though there has been a dissolution.” d. Notice to persons jointly liable Sec. 100 of the Negotiable Instrument Law provides that: “Notice to joint persons who are not partners must be given to each of them unless one of them has authority to receive such notice for the others.” e. Notice to bankrupt Sec. 101 of the Negotiable Instrument Law states that: “Where a party has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of creditors, notice may be given either to the party himself or to his trustee or assignee.” 5. When notice is excused Sec. 109 of the Negotiable Instrument Law provides that: “Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied.” Sec. 110 of the Negotiable Instrument Law states that: “Where the waiver is embodied in the instrument itself, it is binding upon all parties; but, where it is written above the signature of an indorser, it binds him only.” Sec. 111 of the Negotiable Instrument Law states that: “A waiver of protest, whether in the case

of a foreign bill of exchange or other negotiable instrument, is deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor.” Sec. 112 of the Negotiable Instrument Law states that: “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.” Sec. 114 of the Negotiable Instrument Law provides that: “Notice of dishonor is not required to be given to the drawer in either of the following cases: (a) Where the drawer and drawee are the same person; (b) When the drawee is fictitious person or a person not having capacity to contract; (c) When the drawer is the person to whom the instrument is presented for payment; (d) Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument; (e) Where the drawer has countermanded payment.” Sec. 115 of the Negotiable Instrument Law provides that: “Notice of dishonor is not required to be given to an indorser in either of the following cases: (a) When the drawee is a fictitious person or person not having capacity to contract, and the indorser was aware of that fact at the time he indorsed the instrument; (b) Where the indorser is the person to whom the instrument is presented for payment; (c) Where the instrument was made or accepted for his accommodation.” 6. When there is delay in giving notice Sec. 113 of the Negotiable Instrument Law states that: “Delay in giving notice of dishonor is excused when the delay is caused by circumstances beyond the control of the holder and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate, notice must be given with reasonable diligence.” DISCHARGE OF INSTRUMENTS:

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro A. Concept of Discharge Discharge means a release of all parties, whether primary or secondary, from the obligations arising thereunder. It renders the instrument without force and effect and consequently, it can no longer be negotiated. *Applies to the instrument or to the source of liability. B. How instrument is discharge Sec. 119 of the Negotiable Instrument Law provides that: “A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.” 1. Payment in due course Sec. 88 of the Negotiable Instrument Law provides that: “Payment is made in due course when it is made at or after the maturity of the payment to the holder thereof in good faith and without notice that his title is defective.” a. By the principal debtor Sec. 119 (a) of the Negotiable Instrument Law states that: “A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; x x x” b. By the accommodated party Sec. 119 (b) of the Negotiable Instrument Law provides that: “A negotiable instrument is discharged: x x x (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; x x x” 2. Intentional cancellation a. Rule in case of unintentional cancellation Sec. 123 of the Negotiable Instrument Law states that: “A cancellation made unintentionally or under a mistake or without the authority of the holder, is

inoperative but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority.” 3. Any act that discharge simple contracts *The law on Obligations and Contracts will apply. Article 1231 of the New Civil Code provides that: “Obligations are extinguished: (1) By payment or performance: (2) By the loss of the thing due: (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation. Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code.” *Although these ways discharge the instrument as between immediate parties, they will not do so in the hands of a holder in due course. 4. Principal debtor becomes a holder C. Discharge of persons secondarily liable Sec. 120 of the Negotiable Instrument Law provides that: “A person secondarily liable on the instrument is discharged: (a) By any act which discharges the instrument; (b) By the intentional cancellation of his signature by the holder; (c) By the discharge of a prior party; (d) By a valid tender or payment made by a prior party; (e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is expressly reserved; (f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved.” CHECKS: A. Checks defined Sec. 185 of the Negotiable Instrument Law provides that: “A check

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check.” *Checks need not be presented for acceptance *Checks are always payable on demand *Checks are always drawn against a bank *In case of refusal by drawee bank, payee or holder cannot compel drawee bank to pay because there is no privity of contract. Recourse: Serve notice of dishonour to drawer; ran after the drawer B. Distinguished from Draft Other Bill of Exchange Not drawn on a deposit. It is not necessary that a drawer of a Bill of Exchange should have funds in the hands of the drawee. Exist for circulation Death of the drawer of a Bill of Exchange with the knowledge of the bank, does not revoke the authority of the banker to pay. May be presented for payment within a reasonable time after its last negotiation.

Check It is necessary that a check is drawn on a previous deposit. Otherwise, there would be fraud. Always bank as a drawee, need not be presented for acceptance. Exist for immediate payment Death of the drawer of a check, with the knowledge by the bank, revokes the authority of the banker to pay. Must be presented for payment within a reasonable time after its issue. Checks become stale after 6 months from issue.

C. Relationship between drawer, drawee and payee Drawer – is a secondarily liable; admits the existence of a payee and his capacity to indorse and engages that the instrument will be accepted or paid by the party primarily liable and engages that if the instrument is dishonored and proper proceedings are brought he will pay to the party entitled to be paid. Drawee – primarily liable; engages to 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 and admits the existence of the payee and his capacity to indorse. Payee – the person who is named to received the payment. The one who can indorse for further negotiation. D. Kinds of check 1. Cashier’s and manager’s check a bill of exchange drawn by a bank upon itself, and is accepted by its issuance. *Treated as good as cash. *The drawee and the drawer are one and the same. BSP Circular 259 series of 2000 provides that: “Pursuant to Monetary Board Resolution No. 1494 dated 1 September 2000, additional antimoney laundering rules and regulations for banks are hereby issued as follows: Section 1. Issuance of Cashier’s, Manager’s or Certified Checks. Banks shall not issue cashier’s, manager’s or certified checks or other similar instruments payable to cash, bearer, fictitious payee or numbered account. When the person purchasing the abovementioned instruments is not a regular bank client, the issuing bank shall require the purchaser to present his/her proof of residence together with his/her driver’s license, passport, employment I.D. or other photo identification card. A register for cashier’s, manager’s or certified checks issued shall be maintained by the bank. Section 2. Sanction. Any violations of the provision of this Circular shall be subject to a fine of P30,000 per transaction.” BSP Circular No. 291 series 2001 provides that: “The Monetary Board, in its Resolution No. 707 dated 10 May 2001 decided to authorize the issuance of cashier’s, manager’s or certified checks or other similar instruments in blank or payable to cash, bearer or numbered account as an exception from the provisions of Circular no. 259, subject to the following conditions: a. That the amount of each check shall not exceed P10,000.00; b. That the buyer of the check is properly identified as required under Circular No. 259 dated 29 September; c. That a register of said checks shall be maintained with the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro following minimum information: 1. Date issued; 2. Amount; 3. Name of buyer; 4. Date paid; 5. If the aggregate instruments purchased by the same person within any thirty (30) day period amounts to at least fifty thousand pesos (P50,000), the purpose of the buyer should be stated.; d. That banks which issue as well as those which accept as deposits, said cashier’s, manager’s or certified checks or other similar instruments issued in blank or payable to cash, bearer or numbered account shall take such measure(s) as may be necessary to ensure that said instruments are not being used/resorted to by the buyer or depositor in furtherance of a moneylaundering activity; e. That the deposit of said instruments shall be subject to the same requirements/scrutiny applicable to cash deposits; f. That transactions involving said instruments should be accordingly reported to the Bangko Sentral ng Pilipinas if there is reasonable ground to suspect that said transactions are being used to launder funds of illegitimate origin.” 2. Certified check one drawn by a depositor upon funds to his credit in a bank which a proper officer of the bank certifies will be paid when duly presented for payment. *There is a guarantee that upon presentment it will be accepted. *It is accepted in advance. *Certification is equivalent to acceptance. *It is forbidden to issue a stop order payment. Sec. 187 of the Negotiable Instrument Law provides that: “Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance.” Sec. 188 of the Negotiable Instrument Law provides that: “Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon.” Sec. 189 of the Negotiable Instrument Law provides that: “A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank,

and the bank is not liable to the holder unless and until it accepts or certifies the check.” 3. Crossed Check done by writing two parallel lines diagonally on the left top portion of the checks. Article 541 of the Code of Commerce provides that: “The maker of any legal holder of a check shall be entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing across the face the name of said banker or institution, or only the words "and company". a. Effects of crossing a check 1. The check may not be encashed but only deposited in the bank 2. The check may be negotiated only once – to one who has an account with the bank 3. The act of crossing serves as a warning to the holder that the check has been issued for a definite purpose so that he may inquire if he has received the check pursuant to that purpose. 4. Memorandum and traveller’s check Memorandum Check is in the form of an ordinary check, with the word “memorandum”, “memo” or “mem” written across its face, signifying that the maker or drawer engages to pay the bona fide holder absolutely, without any condition concerning its presentment. Such check is an evidence of debt against the drawer, and although it may not be intended to be presented, has the same effect as an ordinary check, and if passed to a third person, will be valid in his hands like any other check. Traveller’s Check instruments purchased from banks, express companies, or the like, in various denominations, which can be used like cash upon second signature by the purchaser. It has the characteristics of a cashier’s check of the issuer. It requires the signature of the purchaser at the time he buys it and also at the time he uses it – that is when he obtains the check from the bank and also at the time he delivers the same to the establishment that will be paid thereby.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro E. When required to be presented for payment Sec. 186 of the Negotiable Instrument Law provides that: “A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay.” F.

Effect of death of drawer *In case of death of the drawer, the bank may refuse payment provided that there was a proper notice of the death of the drawer given to bank.

G. Pertinent Philippine Corporation rules

Clearing

House

imported and warehoused on the dock, upon the faith of the bills of lading, as a recognition of his title to the goods. CONCEPT OF WAREHOUSING BUSINESS Main transaction: For deposit *Warehousing is for safe keeping; storage and preservation of goods. Q: What does warehousing business consists of? A: An establishment with facilities used for safekeeping Q: What relationship is created? A: Bailor-bailee relationship Purposes: 1. To regulate the business of receiving commodities for storage in order; 2. To protect persons who may want to avail themselves of warehouse facilities; and 3. To encourage the establishment of more warehouses.  To achieve this purpose, any person who wants to engage in the business of receiving commodities for storage is required by the Act to first secure a license therefore from the Department of Trade and Industry.

WAREHOUSE RECEIPTS LAW

Any warehouseman receiving commodities for storage, milling, or commingling must:

Document of Title to Goods includes any bill of lading, dock warrant, ‘quedan’, or warehouse receipt or order for delivery of goods, or any other document used in the ordinary course of business in the sale or transfer of goods, as proof of possession or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive either by indorsement or by delivery, goods represented by such document. *This document of title to goods is issued by operator of warehousing business. *Civil Code is applied in suppletory manner. *Document of title to goods facilitates sale of goods; it also facilitates the transfer of title to goods. *It is the delivery of the thing that transfers ownership to the buyer. Principle: Title follows where the document is.

1. obtain prior license from the Bureau of Commerce; 2. file a bond in an amount equivalent to 33 1/3% of the capacity of the warehouse against which bond depositors may sue directly (pour autrui); 3. open to the public; no discrimination allowed; 4. liable for double market value should he accept if goods are damaged or destroyed.  a warehouse accepting tobacco for flueing is covered by law.  Itinerant miller of palay who keeps palay in process of milling under a camalig falls within the law.  A mill which must store palay temporarily must still get the license from the Bureau.

Kinds: 1. Bill of Lading is a document that serves as evidence of receipt of goods for shipment issued by a common carrier. 2. Warehouse Receipt is a document of title which is issued by a warehouseman. 3. Quedan is a warehouse receipt that covers sugar. 4. Dock Warrant is a warrant given by dock-owners to the owner of merchandise

DUTIES OF A WAREHOUSEMAN Warehouseman means a person lawfully engaged in the business of storing goods for profit. Duties: 1. Included in the business of receiving commodity for storage (Sec. 2) 2. It includes entering into any contract or transaction wherein: a. the warehouseman is obligated to return the very same commodity delivered to him or to pay its value; b. commodity delivered to him or to pay its value;

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro c. the commodity delivered is to be milled for the owner thereof; d. 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 to pay its value. WAREHOUSE RECEIPTS A. Functions 1. It is a contract 2. Evidence of receipt of goods – proof of title/document of title 3. Represents the goods and therefore operates as transferable document that carries with it control over the goods. It is used to pass title to the goods. Q: May warehouse receipts be treated as negotiable instrument? Why? A: NO. Because it is not payable in sum certain in money. Warehouse receipts represent goods. Commercial Value: Transfer of title is possible *Delivery of warehouse receipt represents constructive delivery. Controlling element: warehouse receipt B. Forms of Receipts Sec. 2 of the Warehouse Receipt Law states that: “Warehouse receipts need not be in any particular form but every such receipt must embody within its written or printed terms: (a) The location of the warehouse where the goods are stored, (b) The date of the issue of the receipt, (c) The consecutive number of the receipt, (d) A statement whether the goods received will be delivered to the bearer, to a specified person or to a specified person or his order, (e) The rate of storage charges, (f) A description of the goods or of the packages containing them, (g) The signature of the warehouseman which may be made by his authorized agent, (h) If the receipt is issued for goods of which the warehouseman is owner, either solely or jointly or in common with others, the fact of such ownership, and (i) A statement of the amount of advances made and of liabilities incurred for which the warehouseman claims a lien. If the precise amount of such advances made or of such liabilities incurred is, at the time of the issue of, unknown to the

warehouseman or to his agent who issues it, a statement of the fact that advances have been made or liabilities incurred and the purpose thereof is sufficient. A warehouseman shall be liable to any person injured thereby for all damages caused by the omission from a negotiable receipt of any of the terms herein required.” *The date of the issue of the receipt pertains to the time when the contract was perfected. *The purpose for the description of the goods or of the packages containing them is for identification. Sec. 3 of the Warehouse Receipt Law states that: “A warehouseman may insert in a receipt issued by him any other terms and conditions provided that such terms and conditions shall not: (a) Be contrary to the provisions of this Act. (b) In any wise impair his obligation to exercise that degree of care in the safekeeping of the goods entrusted to him which is reasonably careful man would exercise in regard to similar goods of his own.” C. Kinds of Warehouse receipts 1. Negotiable Sec. 5 of the Warehouse Receipt Law states that: “A receipt in which it is stated that the goods received will be delivered to the bearer or to the order of any person named in such receipt is a negotiable receipt. No provision shall be inserted in a negotiable receipt that it is nonnegotiable. Such provision, if inserted shall be void.” *Goods are deliverable to order or bearer. 2. Non-negotiable Sec. 4 of the Warehouse Receipt Law states that: “A receipt in which it is stated that the goods received will be delivered to the depositor or to any other specified person is a nonnegotiable receipt.” *Goods are deliverable to the depositor or specified person. Example: consignee Distinction between Negotiable and Non-negotiable Warehouse Receipts: Negotiable Warehouse

Non-Negotiable Warehouse Receipt

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

Receipt Negotiation (Sec. 41) Title to the goods of the person negotiating the receipt and title of the person to whose order the goods were to be delivered. Direct obligation of the warehouseman to hold possession of the goods for him as if the warehouseman directly contracted with him (Sec. 41) Negotiation defeats the lien of the seller of the goods. (Sec. 25)

Cannot unless in proper circumstances

Transfer or Assignment Title of the goods, as against the transferor (merely steps into the shoes) Transferee acquires title The title is conditional Right to notify the warehouseman of the transfer and acquire the direct obligation of the warehouseman to hold the goods for him. (Sec. 42) In case of double sale or lien on the supply, before notification, title of the transferee may still be defeated Can be subject to such

Q: Regardless of the forms of the warehouse receipt, are the functions of the warehouse receipts still applicable? A: YES. *The importance of knowing whether the warehouse receipt is a negotiable one or not lies to what kind of protection is given to the buyer. Example: W → A(depositor) → B(buyer) W issued a negotiable warehouse receipt to depositor Q: What are the legal contemplations of the issuance of such warehouse receipt? A: 1. Transfer of title is possible assuming that the transferor has legal title to the goods; 2. Warehouseman’s direct obligation; 3. those provided in Sec. 25 of the Warehouse Receipts Law; and Sec. 49 of the Warehouse Receipt Law. *By negotiation, transferee acquires title to the goods. *Sec. 49 of the Warehouse Receipts Law substantially provides that the seller’s recourse is to look for any other properties in case the goods is not sufficient to cover his lien. NEGOTIATION OF RECEIPTS a. Bearer and order receipts

Negotiation by Delivery (Bearer Receipt) Sec. 37 of the Warehouse Receipt Law provides that: “A negotiable receipt may be negotiated by delivery: (a) Where, by terms of the receipt, the warehouseman undertakes to deliver the goods to the bearer, or (b) Where, by the terms of the receipt, the warehouseman undertakes to deliver the goods to the order of a specified person, and such person or a subsequent indorsee of the receipt has indorsed it in blank or to bearer. Where, by the terms of a negotiable receipt, the goods are deliverable to bearer or where a negotiable receipt has been indorsed in blank or to bearer, any holder may indorse the same to himself or to any other specified person, and, in such case, the receipt shall thereafter be negotiated only by the indorsement of such indorsee.” *Sec. 37 (a) where, by terms of the receipt, the warehouseman undertakes to deliver the goods to the bearer; negotiation takes place by mere delivery. Example: Q: W, warehouseman, issued a warehouse receipt to A or bearer. A wants to negotiate it to B. How can A negotiate it to B? A: By delivery since it is a bearer warehouse receipt. Q: B wants to negotiate it to C, how can negotiation be made? And C wants to negotiate it further to D, how can C negotiate it to D? A: By delivery. *Sec. 37 (b) where, by the terms of the receipt, the warehouseman undertakes to deliver the goods to the order of a specified person, and such person or a subsequent indorsee of the receipt has indorsed it in blank or to bearer; Indorsement is essential in transferring title to the transferee and then delivery Example: Q: W, warehouseman, issued a warehouseman to A or order. A wants to negotiate it to B, how can he effectively negotiate it to B? A: A must indorse and deliver it to B Q: B wants to negotiate it further to C, how can he do it? A: It depends on what kind of indorsement was made by A. If the indorsement made by A was a special indorsement, then B can negotiate it to C by indorsing the warehouse receipt and coupled with

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro delivery. If the indorsement was blank, he can negotiate it by delivery. *A bearer document of title is not always a bearer document in the sense that a special indorsement has the effect of converting the bearer instrument into an order instrument. Example: A negotiable document of title states that the goods are to be delivered to “A or bearer”. A delivered the document to B, who in turn specially indorsed the same to C. C cannot negotiate the document by mere delivery thereafter and indorsement is necessary for its negotiation. b. Effects of negotiation 1. Sec. 41 of the Warehouse Receipt Law states that: “A person to whom a negotiable receipt has been duly negotiated acquires thereby: (a) Such title to the goods as the person negotiating the receipt to him had or had ability to convey to a purchaser in good faith for value, and also such title to the goods as the depositor or person to whose order the goods were to be delivered by the terms of the receipt had or had ability to convey to a purchaser in good faith for value, and (b) The direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt as fully as if the warehouseman and contracted directly with him.” 2. Sec. 44 of the Warehouse Receipt Law states that: “A person who, for value, negotiates or transfers a receipt by indorsement or delivery, including one who assigns for value a claim secured by a receipt, unless a contrary intention appears, warrants: (a) That the receipt is genuine, (b) That he has a legal right to negotiate or transfer it, (c) That he has knowledge of no fact which would impair the validity or worth of the receipt, and (d) That he has a right to transfer the title to the goods and that the goods are merchantable or fit for a particular purpose whenever such warranties would have been implied, if the contract of the parties had been to transfer without a receipt of the goods represented thereby.” *Sec. 44 of the Warehouse Receipt Law is similar to Sec. 65 of the Negotiable Instrument Law on warranties of a qualified indorser. Example:

W → A (depositor) → B (buyer) A negotiates the warehouse receipt to B Q: Is A still liable to B? A: YES. A is still liable to B. He is liable in case of breach of warranties. Recourse: In case there is breach of warranty, the buyer can always go after the depositor. 3. Sec. 45 of the Warehouse Receipt Law states that: “The indorsement of a receipt shall not make the indorser liable for any failure on the part of the warehouseman or previous indorsers of the receipt to fulfill their respective obligations.” 4. Sec. 49 of the Warehouse Receipt Law states that: “Where a negotiable receipt has been issued for goods, no seller's lien or right of stoppage in transitu shall defeat the rights of any purchaser for value in good faith to whom such receipt has been negotiated, whether such negotiation be prior or subsequent to the notification to the warehouseman who issued such receipt of the seller's claim to a lien or right of stoppage in transitu. Nor shall the warehouseman be obliged to deliver or justified in delivering the goods to an unpaid seller unless the receipt is first surrendered for cancellation.” 5. Sec. 25 of the Warehouse Receipt Law states that: “If goods are delivered to a warehouseman by the owner or by a person whose act in conveying the title to them to a purchaser in good faith for value would bind the owner, and a negotiable receipt is issued for them, they can not thereafter, while in the possession of the warehouseman, be attached by garnishment or otherwise, or be levied upon under an execution unless the receipt be first surrendered to the warehouseman or its negotiation enjoined. The warehouseman shall in no case be compelled to deliver up the actual possession of the goods until the receipt is surrendered to him or impounded by the court.” c. Negotiation by fraud, mistake or duress Sec. 47 of the Warehouse Receipt Law provides that: “The validity of the negotiation of a receipt is not impaired by the fact that such negotiation was a breach of duty on the part of the person making the negotiation or by the fact that the owner of the receipt was induced by fraud, mistake or duress or to entrust the possession or custody of the receipt to

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro such person, if the person to whom the receipt was negotiated or a person to whom the receipt was subsequently negotiated paid value therefor, without notice of the breach of duty, or fraud, mistake or duress.” Article 1518 of the New Civil Code states that: “The validity of the negotiation of a negotiable document of title is not impaired by the fact that the negotiation was a breach of duty on the part of the person making the negotiation, or by the fact that the owner of the document was deprived of the possession of the same by loss, theft, fraud, accident, mistake, duress, or conversion, if the person to whom the document was negotiated or a person to whom the document was subsequently negotiated paid value therefor in good faith without notice of the breach of duty, or loss, theft, fraud, accident, mistake, duress or conversion.” TRANSFER THEREOF

OF

RECEIPTS

AND

EFFECTS

Sec. 39 of the Warehouse Receipt Law states that: “A receipt which is not in such form that it can be negotiated by delivery may be transferred by the holder by delivery to a purchaser or donee. A non-negotiable receipt can not be negotiated, and the indorsement of such a receipt gives the transferee no additional right.” Sec. 42 of the Warehouse Receipt Law provides that: “A person to whom a receipt has been transferred but not negotiated acquires thereby, as against the transferor, the title of the goods subject to the terms of any agreement with the transferor. If the receipt is non-negotiable, such person also acquires the right to notify the warehouseman of the transfer to him of such receipt and thereby to acquire the direct obligation of the warehouseman to hold possession of the goods for him according to the terms of the receipt. Prior to the notification of the warehouseman by the transferor or transferee of a non-negotiable receipt, the title of the transferee to the goods and the right to acquire the obligation of the warehouseman may be defeated by the levy of an attachment or execution upon the goods by a creditor of the transferor or by a notification to the warehouseman by the transferor or a subsequent purchaser from the transferor of a subsequent sale of the goods by the transferor.”

LIABILITIES OF INDORSER OR TRANSFEROR Sec. 44 of the Warehouse Receipt Law provides that: “A person who, for value, negotiates or transfers a receipt by indorsement or delivery, including one who assigns for value a claim secured by a receipt, unless a contrary intention appears, warrants: (a) That the receipt is genuine, (b) That he has a legal right to negotiate or transfer it, (c) That he has knowledge of no fact which would impair the validity or worth of the receipt, and (d) That he has a right to transfer the title to the goods and that the goods are merchantable or fit for a particular purpose whenever such warranties would have been implied, if the contract of the parties had been to transfer without a receipt of the goods represented thereby.” *Sec. 44(b) of the Warehouse Receipt Law provides that: “That he has a legal right to negotiate or transfer it” example of which is if the receipt was stolen by someone. *Sec. 44(c) of the Warehouse Receipt Law provides that: “That he has knowledge of no fact which would impair the validity or worth of the receipt” example of which is the absence or illegality of consideration. *Sec. 44(c) of the Warehouse Receipt Law guarantees that the goods are merchantable and fit. *Transferor has the same liabilities as if there was a valid negotiation. Sec. 45 of the Warehouse Receipt Law provides that: “The indorsement of a receipt shall not make the indorser liable for any failure on the part of the warehouseman or previous indorsers of the receipt to fulfill their respective obligations.” *Under the General Bonded Warehouse Law, warehouseman is mandated to post a bond for purposes of security in case there was damage to the goods. WAREHOUSEMAN’S ENFORCEMENT

LIEN

AND

ITS

Sec. 27 of the Warehouse Receipt Law provides that: “Subject to the provisions of section thirty, a warehouseman shall have a lien on goods deposited or on the proceeds thereof in his hands, for all lawful charges for storage and preservation of the goods; also for all lawful claims for money advanced, interest, insurance, transportation, labor, weighing, coopering and other charges and expenses in relation to such goods, also for all reasonable charges and expenses for notice, and advertisements of sale, and for sale of the goods where default had been made in satisfying the warehouseman's lien.” Sec. 29 of the Warehouse Receipt Law provides that: “A warehouseman loses his lien upon goods: (a) By surrendering possession thereof, or (b) By refusing to deliver the goods

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro when a demand is made with which he is bound to comply under the provisions of this Act.” Sec. 33 of the Warehouse Receipt Law states that: “A warehouseman's lien for a claim which has become due may be satisfied as follows: (a) An itemized statement of the warehouseman's claim, showing the sum due at the time of the notice and the date or dates when it becomes due, (b) A brief description of the goods against which the lien exists, (c) A demand that the amount of the claim as stated in the notice of such further claim as shall accrue, shall be paid on or before a day mentioned, not less than ten days from the delivery of the notice if it is personally delivered, or from the time when the notice shall reach its destination, according to the due course of post, if the notice is sent by mail, (d) A statement that unless the claim is paid within the time specified, the goods will be advertised for sale and sold by auction at a specified time and place. In accordance with the terms of a notice so given, a sale of the goods by auction may be had to satisfy any valid claim of the warehouseman for which he has a lien on the goods. The sale shall be had in the place where the lien was acquired, or, if such place is manifestly unsuitable for the purpose of the claim specified in the notice to the depositor has elapsed, and advertisement of the sale, describing the goods to be sold, and stating the name of the owner or person on whose account the goods are held, and the time and place of the sale, shall be published once a week for two consecutive weeks in a newspaper published in the place where such sale is to be held. The sale shall not be held less than fifteen days from the time of the first publication. If there is no newspaper published in such place, the advertisement shall be posted at least ten days before such sale in not less than six conspicuous places therein. From the proceeds of such sale, the warehouseman shall satisfy his lien including the reasonable charges of notice, advertisement and sale. The balance, if any, of such proceeds shall be held by the warehouseman and delivered on demand to the person to whom he would have been bound to deliver or justified in delivering goods. At any time before the goods are so sold, any person claiming a right of property or possession therein may pay the warehouseman the amount necessary to satisfy his lien and to pay the reasonable expenses and liabilities incurred in serving notices and advertising and preparing for the sale up to the time of such payment. The warehouseman shall deliver the goods to the person making payment if he is a person entitled, under the provision of this Act, to the possession of the goods on payment of charges thereon. Otherwise, the warehouseman shall retain the possession of the goods according to the terms of the original contract of deposit.” Sec. 34 of the Warehouse Receipt Law states that: “If goods are of a perishable nature, or by keeping will deteriorate greatly in value, or, by their order, leakage, inflammability, or explosive

nature, will be liable to injure other property , the warehouseman may give such notice to the owner or to the person in whose names the goods are stored, as is reasonable and possible under the circumstances, to satisfy the lien upon such goods and to remove them from the warehouse and in the event of the failure of such person to satisfy the lien and to receive the goods within the time so specified, the warehouseman may sell the goods at public or private sale without advertising. If the warehouseman, after a reasonable effort, is unable to sell such goods, he may dispose of them in any lawful manner and shall incur no liability by reason thereof. The proceeds of any sale made under the terms of this section shall be disposed of in the same way as the proceeds of sales made under the terms of the preceding section.” Sec. 35 of the Warehouse Receipt Law states that: “The remedy for enforcing a lien herein provided does not preclude any other remedies allowed by law for the enforcement of a lien against personal property nor bar the right to recover so much of the warehouseman's claim as shall not be paid by the proceeds of the sale of the property.” Warehouseman’s defences for non-delivery or misdelivery: 1. Loss or destruction of the goods without the fault of the bailee. 2. Failure to surrender the negotiable document of title. 3. Lack of willingness to sign acknowledgment. 4. Receipt by the bailee of a request by or on behalf of the person lawfully entitled to a right of property or possession in the goods, not to make such delivery. 5. The bailee has information that the delivery about to be made was to one not lawfully entitled to the possession of the goods. 6. Delivery to a claimant with better right. 7. Attachment or levy of the goods by a creditor where the document is surrendered or its negotiation is enjoined or the document is impounded. 8. Where the document of title is attached by a creditor. ADVERSE CLAIMS Sec. 17 of the Warehouse Receipt Law provides that: “If more than one person claims the title or possession of the goods, the warehouseman may, either as a defense to an action brought against him for non-delivery of the goods or as an original suit, whichever is appropriate, require all known claimants to interplead.” Sec. 18 of the Warehouse Receipt Law provides that: “If someone other than the depositor or person claiming under him has a

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro claim to the title or possession of goods, and the warehouseman has information of such claim, the warehouseman shall be excused from liability for refusing to deliver the goods, either to the depositor or person claiming under him or to the adverse claimant until the warehouseman has had a reasonable time to ascertain the validity of the adverse claim or to bring legal proceedings to compel claimants to interplead.” Sec. 19 of the Warehouse Receipt Law provides that: “Except as provided in the two preceding sections and in sections nine and thirty-six, no right or title of a third person shall be a defense to an action brought by the depositor or person claiming under him against the warehouseman for failure to deliver the goods according to the terms of the receipt.”

TRUST RECEIPTS LAW Trust Receipt is a security transaction intended to aid in financing importers or dealers in merchandize by allowing them to obtain delivery of goods under certain covenants.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Q: Who executes trust receipt? A: Buyer/Entrustee (Borrower) in favor of the lender /entrustor (Bank) Q: What are the relationships created? A: 1. Entruster-entrustee; 2. Seller-buyer Q: What is the objective of the trust receipts? A: To release the goods in favor of the entruster. *Trust Receipt Law does not infringe the Philippine Constitution on non-imprisonment for non-payment of contractual debt because what the trust receipt law punishes is the abuse made by the entrustee.

collection or renewal. The sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of this Decree. “

TRUST RECEIPT TRANSACTION

FORM OF TRUST RECEIPT

Sec. 4 of the Trust Receipt Law provides that: “A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following: 1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or (c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale; or 2. In the case of instruments, (a) to sell or procure their sale or exchange; or (b) to deliver them to a principal; or (c) to effect the consummation of some transactions involving delivery to a depository or register; or (d) to effect their presentation,

Sec. 5 of the Trust Receipt Law provides that: “A trust receipt need not be in any particular form, but every such receipt must substantially contain (a) a description of the goods, documents or instruments subject of the trust receipt; (2) the total invoice value of the goods and the amount of the draft to be paid by the entrustee; (3) an undertaking or a commitment of the entrustee (a) to hold in trust for the entruster the goods, documents or instruments therein described; (b) to dispose of them in the manner provided for in the trust receipt; and (c) to turn over the proceeds of the sale of the goods, documents or instruments to the entruster to the extent of the amount owing to the entruster or as appears in the trust receipt or to return the goods, documents or instruments in the event of their non-sale within the period specified therein. The trust receipt may contain other terms and conditions agreed upon by the parties in addition to those hereinabove enumerated provided that such terms and conditions shall not be contrary to the provisions of this Decree, any existing laws, public policy or morals, public order or good customs.” PARTIES TO A TRUST RECEIPT TRANSACTION 1. Entruster – release the possession of the goods to the entrustee upon the latter’s execution of the trust receipt. 2. Entrustee – Sec. 9 of the Trust Receipt Law provides that: “The entrustee shall (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for their total

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree.” 3. Seller of the Goods - Not strictly and actually a party to the trust receipt transaction; but merely a party to the contract of sale with the buyer/importer (entrustee). RIGHTS OF THE ENTRUSTER Sec. 7 of the Trust Receipt Law provides that: “The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of this Decree. 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, and the 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. The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee's indebtedness to the entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency. Notice of 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.”

*In Rosario Textile v Home Banker’s, the SC held that ownership of the entruster of the goods is only a fiction. The one really owns the goods are the entrustee. *Entruster is entitled to deficiency. *Entrustee is entitled to receive surplus. Sec. 8 of the Trust Receipt Law provides that: “The entruster holding a security interest shall not, merely by virtue of such interest or having given the entrustee liberty of sale or other disposition of the goods, documents or instruments under the terms of the trust receipt transaction be responsible as principal or as vendor under any sale or contract to sell made by the entrustee.” Sec. 12 of the Trust Receipt Law provides that: “The entruster's security interest in 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.” OBLIGATIONS/LIABILITIES ENTRUSTEE

OF

THE

Sec. 9 of the Trust Receipt Law states that: “The entrustee shall (1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree.” *Failure to return the proceeds or failure to return the goods in case of non-sale is equivalent to estafa. Sec. 10 of the Trust Receipt Law states that: “The risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments which are the subject of a trust receipt, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof.” *In Landl & Co. (Phil.) v Metrobank, the SC held that the entrustee is still liable to pay the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro entruster (bank) even if the goods were returned to the latter. Reason why entrustee is obligated to return the goods to the entruster: To put the goods in the disposal of the entruster (bank) RIGHTS OF PURCHASER Sec. 11 of the Trust Receipt Law provides that: “Any purchaser of goods from an entrustee with right to sell, or of documents or instruments through their customary form of transfer, who buys the goods, documents, or instruments for value and in good faith from the entrustee, acquires said goods, documents or instruments free from the entruster's security interest.” PENALTIES Sec. 13 of the Trust Receipt Law provides that: “The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.” *The criminal liability does not infringe the Constitution because what the law punishes is the abuse in the use of the commercial facility made by the entrustee. *This is not a dacion en pago because the liability of the entrustee is not extinguished from the moment the goods are returned to the entruster.

INSURANCE CODE (P.D. 1460 as amended) INTRODUCTION: A. Laws governing Insurance Insurance Code – primary law New Civil Code – applied suppletorily specifically on law on obligations and contracts GSIS Act Property Insurance Law Act 1498 B. General Concept of Insurance Contract of Insurance is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. (Sec. 2 par. 2) *It is a contract of assumption of risk Q: Who will take the risk? A: Insurer

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Q: Who will be exposed to the risk? A: Insured C. Characteristics 1. Risk Distributing Device – the device of insurance serves to distribute the risk of economic loss among as many as possible to those who are subject to the same kind of risk. *The risk is distributed to the group of persons having the same risk. Q: Why is it a risk distribution device? A: Insurer has different policyholders that contribute to a common fund for the same risk. The common fund will indemnify the person who suffers loss for the same risk. Catch: not all policyholders will suffer the same risk at the same time. 2. Contract of Adhesion – Insurance is a contract of adhesion considering that most of the terms of the contract do not result from mutual negotiations between the parties as they are prescribed by the insurer in printed form to which the insured may “adhere” if he chooses but which he cannot change. *Insurer always comes up with already made contract. Q: Is there a contract? A: YES. Importance of knowing whether the contract is one of adhesion: In case of doubt, the contract shall be interpreted strictly against the insurer and liberally in favor of the insured. Q: is this rule unfair? A: NO. Because the contract was already prepared by the insurer, the only thing that the insured can do is either take it wholly or leave it. 3. Aleatory – The obligation of the insurer to pay the proceeds of the insurance arises only upon the happening of an event which is uncertain, or which is to occur at an indeterminate time. (Article 2010 NCC) *The insurer becomes liable upon the happening of the peril insured against. *One or both parties are reciprocally bound to give or do something for consideration upon the happening of an event which is uncertain or to which is to occur at an indeterminate time. 4. Contract of Indemnity - The insured who has insurable interest over a property is only entitled to recover the amount of actual loss sustained and

the burden is upon him to establish the amount of such loss. *It is the basis of all property insurance. *Life insurance is not a contract of indemnity. Life is not subject to pecuniary estimation; Life is precious. General Rule: Insurance contract is a contract of indemnity. Exception: Life insurance 5. Uberrimae Fides Contract/Utmost Good Faith – The contract of insurance is one of perfect good faith not for the insured alone but equally so for the insurer; in fact, it is more so for the latter since its dominant bargaining position carries with it stricter responsibility. *Since there was an assumption of risk on the part of the insurer, it is their duty to make an intelligent estimates that is the reason why it requires the parties to the contract of insurance to disclose conditions affecting the risk of which he is aware, or material fact, which the applicant knows, and those, which he ought to know. *Material facts are facts needed by the insurer for the determination of whether he will assume or not the risk. D. Elements of Insurance 1. Existence of an insurable interest Sec. 12 of the Insurance Code provides that: “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 nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified.” Sec. 13 of the Insurance Code provides that: “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. 14 of the Insurance Code provides that: “An insurable interest in property may consist in: (a) An existing interest; (b) An inchoate interest founded on an existing interest; or

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2.

3.

4. 5.

(c) An expectancy, coupled with an existing interest in that out of which the expectancy arises.” Risk of loss Sec. 51 paragraph g of the Insurance Code provides that: “ A policy of insurance must specify: x x x (g) The period during which the insurance is to continue.” Assumption of risks Sec. 2 of the Insurance Code states that: “xxx (1) A “contract of insurance” is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event.” Scheme to distribute losses Payment of premiums Sec. 77 of the Insurance Code states that: “An insurer is entitled to payment of the 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 thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies.”

E. Right of Subrogation *This principle is a normal incident of indemnity property insurance as a legal effect of payment; it inures to the insurer without any formal assignment or any express stipulation to that effect in the policy. Said right is not dependent upon nor does it grow out of any privity of contract. Payment to the insured makes the insurer an assignee in equity. *The insurer can only recover from the third person what the insured could have recovered. Thus, there can be no recovery if the insurer voluntarily paid even if the loss is not covered by the policy. *The insured can no longer recover from the offending party what was paid to him by the insurer but he can recover any deficiency, that is, if his damages is more than what was paid. The deficiency is not covered by the right of subrogation. Cases when there is no right of subrogation:

1. The insured by his own act releases the wrongdoer/third person liable for the loss 2. Where the insurer pays the insured for a loss or risk not covered by the policy 3. In life insurance 4. For recovery of loss in excess of insurance coverage CONTRACT OF INSURANCE: A. Requisites of a contract of Insurance 1. A subject matter in which the insured has an insurable interest 2. Event or peril insured against which may be any future contingent or unknown event, past or future and a duration for the risk thereof 3. A promise to pay or indemnify in a fixed or ascertainable amount 4. A consideration known as premium 5. Meeting of the minds of the parties B. Perfection *An insurance contract is consensual contract and is therefore perfected the moment there is a meeting of minds with respect to the object and the cause or consideration. *What is being followed in insurance contracts is what is known as the Cognition Theory. Q: What is the crucial point? A: The point wherein there must be an actual communication to the insured of the approval of the application. *In Great Pacific Life Assurance Corporation v CA, the SC held that the insured is the one making the offer by submitting an application to the insurer and the latter accepts the offer by approving the application. Thus, mere submission of the application without the corresponding approval of the policy does not result in the perfection of the contract of insurance. C. Parties to a contract of Insurance Sec. 6 of the Insurance Code states that: “Every person, partnership, association, or corporation duly authorized to transact insurance business as elsewhere provided in this code, may be an insurer.” Sec. 7 of the Insurance Code states that: “Anyone except a public enemy may be insured.”

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Beneficiary – person designated to receive proceeds of policy when risk attaches. General Rule: When one insures his own life, he may designate any person as the beneficiary, whether or not the beneficiary has an insurable interest in the life of the insured. Exceptions: Persons specified in Article 739 in re Article 2012 of the New Civil Code. *The designation of persons mentioned in Article 739 is void but the policy is binding. *In property insurance, the beneficiary must have insurable interest on the property. Sec. 11 of the Insurance Code states that: “The insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in said policy.” *The designation is revocable unless the right to revoke is expressly waived in the policy. Sec. 12 of the Insurance Code states that: “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 nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified.” *In life or health insurance, the insured cannot assign the policy if the designation of the beneficiary is irrevocable. Reason: The irrevocable beneficiary has vested right. *If the insured refuses to pay the premiums, the designated irrevocable beneficiary may continue the policy by paying premiums that are due. (Article 1236 NCC) Q: Despite irrevocable designation, may the insured revoke the beneficiary? A: YES. Under Article 42 of the Family Code, Article 43 (4) of the Family Code, Article 50 of the Family Code and Article 64 of the Family Code. 1. Rule on minors Sec. 3 of the Insurance Code states that: “Any minor of the age of eighteen years or more, may, notwithstanding such minority, contract for life, health and accident insurance, with any insurance company duly authorized to do business in the Philippines, provided the insurance is taken on his

own life and the beneficiary appointed is the minor's estate or the minor's father, mother, husband, wife, child, brother or sister.” *This portion is repealed by RA 6809. Under RA 6809, minors are no longer allowed to enter into insurance contracts. This rule is absolute. 2. Rule on married women Sec. 3 of the Insurance Code provides that: “The married woman or the minor herein allowed to take out an insurance policy may exercise all the rights and privileges of an owner under a policy.” *Under RA 7192, married women can enter into insurance contracts without the assistance of their husbands. D. Subject matter of Insurance Sec. 3 of the Insurance Code states that: “Any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him, may be insured against, subject to the provisions of this chapter.” Sec. 4 of the Insurance Code states that: “The preceding section does not authorize an insurance for or against the drawing of any lottery, or for or against any chance or ticket in a lottery drawing a prize.” E. Insurance not a wagering contract Sec. 4 of the Insurance Code states that: “The preceding section does not authorize an insurance for or against the drawing of any lottery, or for or against any chance or ticket in a lottery drawing a prize.” *Wagering contract is not allowed because it is against public policy. Reason: The insured should not be happy because of the loss he suffered. Q: What prevents insurance policy from being a wagering contract? A: Insurable interest. INSURABLE INTEREST: A. Concept of Insurable Interest in General *A person has an insurable interest in the subject matter if he is so connected, so situated, so circumstanced, so related, that by the preservation of the same he shall derive pecuniary benefit, and by its

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro destruction he shall suffer pecuniary loss, damage or prejudice.” *Insurable interest does not exist by legal relationship or by virtue of law. B. Reason for the requirement of insurable interest *A policy issued to a person without the requisite insurable interest in the subject matter is a mere wager policy or contract, hence, it is VOID. Evil sought to be avoided: Temptation to destroy the thing insured. Reason: He has nothing to lose but everything to gain. C. Insurable interest in Life Insurance Sec. 10 of the Insurance Code provides that: “Every person has an insurable interest in the life and health: (a) Of himself, of his spouse and of his children; (b) Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; (c) Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and (d) Of any person upon whose life any estate or interest vested in him depends.” Q: May warehouseman insure the goods deposited in his warehouse? A: YES. In case of loss of the goods the warehouseman is liable to the owner of the goods. Q: May bottomry lender insures the hypothecated vessel? A: YES. There is an insurable interest up to the amount covered by the bottomry. Q: Who gets the proceeds of the insurance? A: The insured and the beneficiary. *In life insurance, persons prohibited to make donation to each other are also prohibited to become beneficiaries of each other. *For disqualification purposes, what is needed is only a preponderance of evidence. D. Insurable interest in Property Insurance Sec. 13 of the Insurance Code states that: “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. 14 of the Insurance Code states that: “An insurable interest in property may consist in: (a) An existing interest; (b) An inchoate interest founded on an existing interest; or (c) An expectancy, coupled with an existing interest in that out of which the expectancy arises.” *In general, a person has an insurable interest in the property, if he derives pecuniary benefit or advantage from its preservation or would suffer pecuniary loss, damage or prejudice by its destruction whether he has or has no title in, or lien upon, or possession of the property. *Existence of insurable interest is a matter of public policy, hence, the principle of estoppels cannot be invoked. *In order for hope or expectancy to be insurable, it must be coupled with existing interest out of which the expectancy arises. It must be founded on an actual right to the thing or upon a valid contract. Sec. 19 of the Insurance Code states that: “An interest in property insured must exist when the insurance takes effect, and when the loss occurs, but not exist in the meantime; and interest in the life or health of a person insured must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs.” Sec. 20 of the Insurance Code states that: “Except in the cases specified in the next four sections, and in the cases of life, accident, and health insurance, a change of interest in any part of a thing insured unaccompanied by a corresponding change in interest in the insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person.” Sec. 25 of the Insurance Code states that: “Every stipulation in a policy of insurance for the payment of loss whether the person insured has or has not any interest in the property insured, or that the policy shall be received as proof of such interest, and every policy executed by way of gaming or wagering, is void.” 1. Insurable interest in case of mortgaged property

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Sec. 8 of the Insurance Code states that: “Unless the policy otherwise provides, where a mortgagor of property effects insurance in his own name providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a mortgagee, the insurance is deemed to be upon the interest of the mortgagor, who does not cease to be a party to the original contract, and any act of his, prior to the loss, which would otherwise avoid the insurance, will have the same effect, although the property is in the hands of the mortgagee, but any act which, under the contract of insurance, is to be performed by the mortgagor, may be performed by the mortgagee therein named, with the same effect as if it had been performed by the mortgagor.” a. Standard or Union Mortgage Clause – subsequent acts of the mortgagor cannot affect the rights of the assignee. b. Open or Loss Payable Clause – acts of the mortgagor affect the mortgagee. Reason: Mortgagor does not cease to be a party to the contract. Basis: Sec. 8 of the Insurance Code states that: “Unless the policy otherwise provides, where a mortgagor of property effects insurance in his own name providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a mortgagee, the insurance is deemed to be upon the interest of the mortgagor, who does not cease to be a party to the original contract, and any act of his, prior to the loss, which would otherwise avoid the insurance, will have the same effect, although the property is in the hands of the mortgagee, but any act which, under the contract of insurance, is to be performed by the mortgagor, may be performed by the mortgagee therein named, with the same effect as if it had been performed by the mortgagor.” Sec. 9 of the Insurance Code states that: “If an insurer assents to the transfer of an insurance from

a mortgagor to a mortgagee, and, at the time of his assent, imposes further obligation on the assignee, making a new contract with him, the act of the mortgagor cannot affect the rights of said assignee.” 2. Effect of change of interest in the thing insured Sec. 20 of the Insurance Code states that: “Except in the cases specified in the next four sections, and in the cases of life, accident, and health insurance, a change of interest in any part of a thing insured unaccompanied by a corresponding change in interest in the insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person.” Sec. 21 of the Insurance Code states that: “A change in interest in a thing insured, after the occurrence of an injury which results in a loss, does not affect the right of the insured to indemnity for the loss.” Sec. 22 of the Insurance Code states that: “A change of interest in one or more several distinct things, separately insured by one policy, does not avoid the insurance as to the others.” *This is a divisible policy. Sec. 23 of the Insurance Code states that: “A change on interest, by will or succession, on the death of the insured, does not avoid an insurance; and his interest in the insurance passes to the person taking his interest in the thing insured.” *This is by operation of law. Sec. 24 of the Insurance Code states that: “A transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to the others, does not avoid an insurance even though it has been agreed that the insurance shall cease upon an alienation of the thing insured.” Sec. 57 of the Insurance Code provides that: “A policy may be 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.”

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *The policy follows where the interest is. Sec. 58 of the Insurance Code provides that: “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.” Article 1306 of the New Civil Code provides that: “The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

As to measure

As to time when insurable interest must exist

As to expectation of benefit to

Insurable Interest in Property Limited to the actual value of the interest in the property.

The insurable interest exists when the insurance takes effect and when the loss occurs but not need exist in the meantime.

There must be a legal

Insurable Interest in Life General Rule: Insurable Interest in life is unlimited. Exception: In life insurance effected by a creditor on the life of the debtor. General Rule: It is enough that the insurable interest exists at the time the policy takes effect and need not exist at the time of the loss. Exception: Obligee must have insurable interest at the time the policy took effect and at the time of loss. The expectation of the

be derived

basis.

benefit to be derived need not have any legal basis. As to the The General beneficiary’ beneficiar Rule: The s interest y must beneficiary have need not insurable have interest insurable over the interest thing over the insured. life of the The policy insured if is still the insured valid, only himself the secured the designatio policy. n was Exception: avoided If the life because insurance the was beneficiar obtained y has no by the insurable beneficiary, interest. the latter must have insurable interest over the life of the insured. Q: In case where the designated beneficiary cannot claim the proceeds due to the fact that such designation was void, who can claim the proceeds? A: Insured. DEVICES FOR ASCERTAINING CONTROLLING RISK AND LOSS:

AND

*Concealment and representation are devices that are related to the formation of the contract whereas warranties and condition are devices that are related to the execution of the contract. A. Concealment 1. Concept Q: When is there concealment? Sec. 26 of the Insurance Code provides that: “A neglect to communicate that which a party knows and ought to communicate, is called a concealment.” 2. Duty to Communicate Sec. 28 of the Insurance Code states that: “Each party to a contract of insurance must communicated to the other, in good faith, all facts within his knowledge which are material to the contract and as to which he makes

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro no warranty, and which the other has not the means of ascertaining.” 3. Test of Materiality Sec. 31 of the Insurance Code provides that: “Materiality is to be 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.” *The fact disclosed may not be the proximate cause of the loss still there is breach because there is a vitiation of consent, the contract is voidable. 4. Effect of Concealment Sec. 27 of the Insurance Code provides that: “A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance.” Sec. 29 of the Insurance Code provides that: “An intentional and fraudulent omission, on the part of one insured, to communicate information of matters proving or tending to prove the falsity of a warranty, entitles the insurer to rescind.” *It vitiates the contract and entitles the insurer to rescind, even if the death or loss is due to a cause not related to the concealed matter. 5. Matters which need not be communicated Sec. 30 of the Insurance Code provides that: “Neither party to a contract of insurance is bound to communicate information of the matters following, except in answer to the inquiries of the other: (a) Those which the other knows; (b) Those which, in the exercise of ordinary care, the other ought to know, and of which the former has no reason to suppose him ignorant; (c) Those of which the other waives communication; (d) Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material; and (e) Those which relate to a risk excepted from the policy and which are not otherwise material.” *Things need not be disclosed. Sec. 32 of the Insurance Code provides that: “Each party to a

contract of insurance is bound to know all the general causes which are open to his inquiry, equally with that of the other, and which may affect the political or material perils contemplated; and all general usages of trade.” Sec. 34 of the Insurance Code provides that: “Information of the nature or amount of the interest of one insured need not be communicated unless in answer to an inquiry, except as prescribed by section fifty-one.” Sec. 35 of the Insurance Code provides that: “Neither party to a contract of insurance is bound to communicate, even upon inquiry, information of his own judgment upon the matters in question. “ 6. Waiver of Information Sec. 33 of the Insurance Code provides that: “The right to information of material facts may be waived, either by the terms of the insurance or by neglect to make inquiry as to such facts, where they are distinctly implied in other facts of which information is communicated.” B. Representation 1. Concept Representations are factual statements made by the insured at the time of or prior to the issuance of the policy to give information to the insurer and otherwise induce him to enter into the insurance contract. *Representation per se is not wrong as long as such representation is true. *The false representation may still be corrected as long as it is made before the issuance of the policy. 2. Kinds of Representation Sec. 36 of the Insurance Code provides that: “A representation may be oral or written.” Sec. 37 of the Insurance Code provides that: “representation may be made at the time of, or before, issuance of the policy.” Sec. 39 of the Insurance Code provides that: “A representation as to the future is to be deemed a promise, unless it appears that it was merely a statement of belief or expectation. “ Sec. 42 of the Insurance Code provides that: “. A representation must

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3.

4.

5.

6.

7.

be presumed to refer to the date on which the contract goes into effect.” Test of Materiality Sec. 46 of the Insurance Code provides that: “The materiality of a representation is determined by the same rules as the materiality of a concealment.” *Facts that may probably and reasonably influence the other party in forming his estimate. Effect of Alteration or Withdrawal Sec. 41 of the Insurance Code provides that: “A representation may be altered or withdrawn before the insurance is effected, but not afterwards.” Time to which representation refers Sec. 42 of the Insurance Code states that: “A representation must be presumed to refer to the date on which the contract goes into effect.” Effect when representation is obtained from third persons Sec. 43 of the Insurance Code provides that: “When a person insured has no personal knowledge of a fact, he may nevertheless repeat information which he has upon the subject, and which he believes to be true, with the explanation that he does so on the information of others; or he may submit the information, in its whole extent, to the insurer; and in neither case is he responsible for its truth, unless it proceeds from an agent of the insured, whose duty it is to give the information.” When presumed false; effect of falsity Sec. 44 of the Insurance Code provides that: “A representation is to be deemed false when the facts fail to correspond with its assertions or stipulations.” Sec. 45 of the Insurance Code states that: “If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time when the representation becomes false. The right to rescind granted by this Code to the insurer is waived by the acceptance of premium payments despite knowledge of the ground for rescission.”

C. Remedies available in case of Concealment or False Representation 1. When rescission by the insurer may be exercised Sec. 48 of the Insurance Code states that: “Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right must be exercised previous to the commencement of an action on the contract. After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent.” General Rule: Prescriptive period: Any time before the commencement of a court action on the contract. Exception: In case of life insurance made payable on the death of the insured. Q: How rescission is made? A: By sending notice of cancellation or rescission to the insured. Even if there is a court action, the insurer may raise concealment or representation as an affirmative defense. 2. When Life insurance policy becomes incontestable Sec. 48 of the Insurance Code states that: “Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right must be exercised previous to the commencement of an action on the contract. After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment or misrepresentation of the insured or his agent.” a. Requisites for incontestability

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 1. The insurance is a life insurance policy payable on the death of the insured. 2. It has been in force during the lifetime of the insured for at least 2 years from its date of issue or of its last reinstatement. The period of 2 years may be shortened but it cannot be extended by stipulation. *The defense should be misrepresentation or concealment only. *If the insured dies within 2 year period, the insurer may still rescind the contract. If the insured died after the 2 year period, the insurer cannot rescind the contract. b. Theory and Object of incontestability After a policy of life insurance made 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 its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent. c. Defenses not barred by incontestability 1. The person taking the insurance lacked insurable interest as required by law 2. The cause of the death of the insured is an excepted risk 3. The premiums have not been paid 4. The conditions of the policy relating to military or naval service have been violated 5. The fraud is of a particularly vicious type 6. The beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened 7. The action was not brought within the time specified. 8. D. Warranties 1. Concept; distinguished from representation

Warranty is a statement or promise set forth in the policy or by reference incorporated therein, the untruth or non-fulfillment of which in any respect, and without reference to whether insurer was in fact prejudiced by such untruth or non-fulfillment , renders the policy voidable. Condition is a provision wherein certain things are mandated by the insurer to be complied with by the insured in order for the latter to recover. Examples: 1. Filing of the claim on time 2. Notice of loss 3. Proof of loss *The condition may be complied with before or after the loss. Warranty Part of the contract Written on the policy or in a valid rider or attachment Generally conclusively presumed to be material The fact warranted must be strictly complied with

Representation A collateral inducement Need not be written Should be established to be material Requires only to be substantially true

2. Kinds of Warranties 1. Express 2. Implied – warranties that are deemed included in the contract although not expressly mentioned. 3. Affirmative – asserts the existence of a fact or condition at the time it is made. 4. Promissory – the insured stipulates that certain facts or conditions shall exists or thing shall be done or omitted. 3. Time to which warranty refers Sec. 68 of the Insurance Code provides that: “A warranty may relate to the past, the present, the future, or to any or all of these.” 4. Effect of Breach Sec. 74 of the Insurance Code states that: “The violation of a material warranty, or other material provision of a policy, on the part of either party thereto, entitles the other to rescind.”

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Sec. 75 of the Insurance Code states that: “A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy.” Sec. 76 of the Insurance Code states that: “A breach of warranty without fraud merely exonerates an insurer from the time that it occurs, or where it is broken in its inception, prevents the policy from attaching to the risk.” POLICY OF INSURANCE: A. Definition and Form Sec. 49 of the Insurance Code states that: “The written instrument in which a contract of insurance is set forth, is called a policy of insurance.” Sec. 50 of the Insurance Code provides that: “The policy shall be in printed form which may contain blank spaces; and any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of insurance shall be written on the blank spaces provided therein. Any rider, clause, warranty or endorsement purporting to be part of the contract of insurance and which is pasted or attached to said policy is not binding on the insured, unless the descriptive title or name of the rider, clause, warranty or endorsement is also mentioned and written on the blank spaces provided in the policy. Unless applied for by the insured or owner, any rider, clause, warranty or endorsement issued after the original policy shall be countersigned by the insured or owner, which countersignature shall be taken as his agreement to the contents of such rider, clause, warranty or endorsement. Group insurance and group annuity policies, however, may be typewritten and need not be in printed form.” *Contract of insurance may be made in any form but the policy of insurance must be in writing. B. Fine Print Rule Insurance is a contract of adhesion considering that most of the terms of the contract do not result from mutual negotiations between the parties as they are prescribed by the insurer in printed

form to which the insured may “adhere” if he chooses but which he cannot change. C. Contents of the Policy Sec. 51 of the Insurance Code provides that: “A policy of insurance must specify: (a) The parties between whom the contract is made; (b) The amount to be insured except in the cases of open or running policies; (c) The premium, or if the insurance is of a character where the exact premium is only determinable upon the termination of the contract, a statement of the basis and rates upon which the final premium is to be determined; (d) The property or life insured; (e) The interest of the insured in property insured, if he is not the absolute owner thereof; (f) The risks insured against; and (g) The period during which the insurance is to continue.” D. Papers attached to the policy and their binding effect (rider, warranties, clause, endorsement) Rider is an attachment to an insurance policy that modifies the conditions of the policy by expanding or restricting its benefits or excluding certain conditions from the coverage. *Riders, together with other attachments to the policy like clause, warranty or endorsements, are not binding on the insured unless the descriptive title or name thereof is mentioned and written on the blank spaces provided in the policy. Purpose: To modify the conditions or provisions. Interpretation: In case of doubt, riders prevail over the policy. *Riders and the like shall be countersigned by the insured or owner unless he was the one who applied for the rider, clause, and warranty. *When the requirements for a rider are complied with including clause, warranty or endorsement, it is considered part of the policy. *It is a part of the original policy which is in the nature of a conditional obligation. E. Kinds of Policy 1. Open Sec. 60 of the Insurance Code states that: “An open policy is one in which the value of the thing insured is

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro not agreed upon, but is left to be ascertained in case of loss.” *To put a threshold for purposes of premium. Advantage: actual valuation; the final valuation is accurate value of the property Disadvantage: hassle Example: Warehouse valued for P1M At the time of loss the actual valuation of the warehouse is P800,000 The insured can only recover P800,000 2. Valued Sec. 61 of the Insurance Code provides that: “A valued policy is one which expresses on its face an agreement that the thing insured shall be valued at a specific sum.” Example: a. Warehouse valued for P1M Agreed valuation is P1M The insured can recover the whole P1M without proving the actual value of the property. b. Warehouse valued for P1.5M Agreed valuation is P1M The insurer can only recover P1M 3. Running Sec. 62 of the Insurance Code provides that: “A running policy is one which 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.” *Usually covers stock and goods in warehouse Purpose: Avoidance of over and under insurance. F. Cover Notes Sec. 52 of the Insurance Code provides that: “Cover notes may be issued to bind insurance temporarily pending the issuance of the policy. Within sixty days after the issue of the cover note, a policy shall be issued in lieu thereof, including within its terms the identical insurance bound under the cover note and the premium therefor. Cover notes may be extended or renewed beyond such sixty days with the written approval of the Commissioner if he determines that such extension is not contrary to and is not for the purpose of violating any provisions of this Code. The Commissioner may promulgate rules and regulations

governing such extensions for the purpose of preventing such violations and may by such rules and regulations dispense with the requirement of written approval by him in the case of extension in compliance with such rules and regulations. “ *This is a preliminary contract of insurance. *The protection is temporary; limited to 60 days only *In Pacific Timber Export Corporation v CA, the SC held that no separate premium is required for the cover note. As an exception, the parties may agree otherwise. G. Cancellation of Policy Sec. 64 of the Insurance Code states that: “No policy of insurance other than life shall be cancelled by the insurer except upon prior notice thereof to the insured, and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective date of the policy, of one or more of the following: (a) non-payment of premium; (b) conviction of a crime arising out of acts increasing the hazard insured against; (c) discovery of fraud or material misrepresentation; (d) discovery of willful or reckless acts or omissions increasing the hazard insured against; (e) physical changes in the property insured which result in the property becoming uninsurable; or (f) a determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of this Code.” Prescriptive Period: Oral = 6 years; written= 10 years Sec. 65 of the Insurance Code states that: “All notices of cancellation mentioned in the preceding section shall be in writing, mailed or delivered to the named insured at the address shown in the policy, and shall state (a) which of the grounds set forth in section sixty-four is relied upon and (b) that, upon written request of the named insured, the insurer will furnish the facts on which the cancellation is based.” Sec. 66 of the Insurance Code states that: “In case of insurance other than life, unless the insurer at least forty-five days in advance of the end of the policy period mails or delivers to the named insured at

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro the address shown in the policy notice of its intention not to renew the policy or to condition its renewal upon reduction of limits or elimination of coverages, the named insured shall be entitled to renew the policy upon payment of the premium due on the effective date of the renewal. Any policy written for a term of less than one year shall be considered as if written for a term of one year. Any policy written for a term longer than one year or any policy with no fixed expiration date shall be considered as if written for successive policy periods or terms of one year.” H. Time to commence action on the policy; effect of stipulation Q: When cause of action accrues? A: From the denial of the claim. Sec. 63 of the Insurance Code provides that: “A condition, stipulation, or agreement in any policy of insurance, limiting the time for commencing an action thereunder to a period of less than one year from the time when the cause of action accrues, is void.” PREMIUM: A. Concept Premium is the consideration paid to an insurer for undertaking to indemnify the insured against a specified peril. Q: Who pays the premium? A: Insured Q: What is the consideration? A: Insured: premium; Insurer: Assumption of risk B. Effect of non-payment of premium; exceptions Sec. 77 of the Insurance Code states that: “. An insurer is entitled to payment of the 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 thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies.” *This is called as Cash and Carry Rule Sec. 78 of the Insurance Code states that: “An acknowledgment in a policy or contract of insurance or the receipt of premium is conclusive evidence of its payment, so far as to make the policy

binding, notwithstanding any stipulation therein that it shall not be binding until the premium is actually paid.” General Rule: No insurance policy issued or renewal is valid and binding until actual payment of premium. Any agreement to the contrary is void. (Cash and Carry Rule) Exceptions: 1. In case of life and industrial life whenever the grace period provision applies (Sec. 77); Requisites: a. Life and industrial life insurance b. There is a grace period c. Grace period still exists 2. Where there is an acknowledgment in the contract or policy of insurance that the premium had already been paid (Sec. 78); Conclusive effect: the validity of the contract/policy and its binding effect. *No conclusive effect as to the payment of premium. *Acknowledgment results to estoppel 3. The rule laid down in Makati Tuscany Condominium v CA to the effect that Sec. 77 may not apply if the parties have agreed to the payment of the premium in installments and partial payment has been made at the time of the loss; *By express agreement Q: What was agreed upon? A: Payment by instalment plan 4. Where a credit term was agreed upon like the agreement in UCPB General Insurance, Inc. v Masagana Telemart where the insurer granted a 60-90 day credit term for the payment of the premiums despite full awareness of Sec.77; *By previous conduct/practice *Insured = principle of equity; insurer = estoppel. 5. Where the parties are barred by estoppels Article 1306 of the : “New Civil Code states that: “The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.” C. When insured entitled to return of premiums Sec. 79 of the Insurance Code states that: “A person insured is entitled to a return of premium, as follows:

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro (a) To the whole premium if no part of his interest in the thing insured be exposed to any of the perils insured against; (b) Where the insurance is made for a definite period of time and the insured surrenders his policy, to such portion of the premium as corresponds with the unexpired time, at a pro rata rate, unless a short period rate has been agreed upon and appears on the face of the policy, after deducting from the whole premium any claim for loss or damage under the policy which has previously accrued; Provided, That no holder of a life insurance policy may avail himself of the privileges of this paragraph without sufficient cause as otherwise provided by law.” Sec. 80 of the Insurance Code states that: “If a peril insured against has existed, and the insurer has been liable for any period, however short, the insured is not entitled to return of premiums, so far as that particular risk is concerned.” Sec. 81 of the Insurance Code states that: “A person insured is entitled to return of the premium when the contract is voidable, on account of fraud or misrepresentation of the insurer, or of his agent, or on account of facts, the existence of which the insured was ignorant without his fault; or when by any default of the insured other than actual fraud, the insurer never incurred any liability under the policy.” Sec. 82 of the Insurance Code states that: “In case of an over-insurance by several insurers, the insured is entitled to a ratable return of the premium, proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk.” PERSONS ENTITLED TO RECOVER ON THE POLICY AND CONDITIONS TO RECOVERY: A. Beneficiary Sec. 11 of the Insurance Code provides that: “The insured shall have the right to change the beneficiary he designated in the policy, unless he has expressly waived this right in said policy.” Sec. 12 of the Insurance Code provides that: “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 nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified.” Sec. 53 of the Insurance Code states that: “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. 56 of the Insurance Code states that: “When the description of the insured in a 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. 57 of the Insurance Code provides that: “A policy may be 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.” Q: Who receives the proceeds? A: General Rule: Beneficiary Exception: In case the designated beneficiary is disqualified, it is the insured who receive the proceeds. General Rule: The designation of the beneficiary is revocable. Exception: Irrevocable In irrevocable designation, the general rule is that the designated beneficiary cannot be changed. Exceptions: 1. The beneficiary consented to the change 2. Under Art. 45 of the Family Code which substantially provides that the innocent spouse has the authority to revoke the designation of his beneficiary 3. In cases where the marriage is declared void ab initio 4. In cases of annulment 5. In cases of legal separation B. Limitations on the appointment of beneficiary Article 2012 of the New Civil Code states that: “Any person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a life insurance policy by the person who cannot make any donation to him, according to said article.” *The prohibition applies only to life insurance policy.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *Under Article 1236 of the New Civil Code, the beneficiary may pay the premium even against the will of the insurer. Reason: Beneficiary has interest over the insurance policy. Article 739 of the New Civil Code states that: ”The following donations shall be void: (1) Those made between persons who were guilty of adultery or concubinage at the time of the donation; (2) Those made between persons found guilty of the same criminal offense, in consideration thereof; (3) Those made to a public officer or his wife, descendants and ascendants, by reason of his office. In the case referred to in No. 1, the action for declaration of nullity may be brought by the spouse of the donor or donee; and the guilt of the donor and donee may be proved by preponderance of evidence in the same action.” C. Rule where insurance is made by an agent or trustee Sec. 54 of the Insurance Code provides that: “When an insurance 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 agent or trustee, or by other general words in the policy.” D. Rule where insurance if made by partner or part owner Sec. 55 of the Insurance Code provides that: “To render an insurance effected by one partner or part-owner, applicable to the interest of his co-partners or other part-owners, it is necessary that the terms of the policy should be such as are applicable to the joint or common interest. “ E. Notice and proof of loss Sec. 88 of the Insurance Code states that: “In case of loss upon an insurance against fire, an insurer is exonerated, if notice thereof be not given to him by an insured, or some person entitled to the benefit of the insurance, without unnecessary delay.” Sec. 89 of the Insurance Code states that: “When a preliminary proof of loss is required by a policy, the insured is not bound to give such proof as would be necessary in a court of justice; but it is

sufficient for him to give the best evidence which he has in his power at the time.” Sec. 90 of the Insurance Code provides that: “All defects in a notice of loss, or in preliminary proof thereof, which the insured might remedy, and which the insurer omits to specify to him, without unnecessary delay, as grounds of objection, are waived.” Sec. 91 of the Insurance Code provides that: “Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any act of him, or if he omits to take objection promptly and specifically upon that ground.” Sec. 92 of the Insurance Code provides that: “If the policy requires, by way of preliminary proof of loss, the certificate or testimony of a person other than the insured, it is sufficient for the insured to use reasonable diligence to procure it, and in case of the refusal of such person to give it, then to furnish reasonable evidence to the insurer that such refusal was not induced by any just grounds of disbelief in the facts necessary to be certified or testified.” DOUBLE INSURANCE: A. Definition and requisites Sec. 93 of the Insurance Code provides that: “A double insurance exists where the same person is insured by several insurers separately in respect to the same subject and interest.” Requisites: 1. The person insured is the same 2. There are two or more insurers insuring separately 3. The subject matter is the same 4. The interest insured is also the same 5. The risk or peril insured against is likewise the same B. Distinguished from Over-insurance Distinctions: Double Insurance There may be no over-insurance as when the sum total of the amounts of the policies issued does not exceed the insurable interest of the insured There are always

Over-Insurance When the amount of the insurance is beyond the value of the insured’s insurable interest

There may only be

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro several insurers

one insurer involved

*There is over-insurance if the total amount exceeds the value of the thing insured. Example: In Fire Insurance, A insured his property to X for 500,000, to Y for 1M and to Z for 1M totalling to P2.5M. The property valued only for 1M. In this situation there is overinsurance. C. Stipulation against double insurance Q: Is double insurance legally prohibited? A: General Rule: NO. Exception: If prohibited by an “other insurance clause.” Basis: Sec. 75 of the Insurance Code which provides that: “A policy may declare that a violation of specified provisions thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid the policy.” D. Rules for payment where there is over-insurance by double insurance Sec. 94 of the Insurance Code states that: “Where the insured is over-insured by double insurance: (a) The insured, unless the policy otherwise provides, 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; (b) 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 other policy without regard to the actual value of the subject matter insured; (c) 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 any policy; (d) Where the insured receives any sum in excess of the valuation in the case of valued policies, or of the insurable value in the case of unvalued policies, he must hold such sum in trust for the insurers, according to their right of contribution among themselves; (e) Each insurer is bound, as between himself and the other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract.”

Formula: Insurance Policy --------------------------- x Amount of loss Total of Policy taken X =

500000 --------- x 1M = 200,000 2.5M

Y =

1M -------- x 1M = 400,000 2.5M

Z =

1M -------- x 1M = 400,000 2.5M

*The balance shall be returned. *As far as the excess payment is concern, the excess shall be held in trust by the insured. REINSURANCE: *This is called a Liability Insurance A. Definition Sec. 95 of the Insurance Code provides that: “A contract of reinsurance is one by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance.” Example: In fire insurance, A insured his property against fire to X, X reinsured his obligation to Y. Q: Can A recover to the reinsurer? A: General Rule: NO Reason: No privity of contract Exception: Stipulation stating that the policy is taken for the benefit of the insured of the first contract of insurance. (Stipulation pour autrui) Q: Can X recover from Y even if X has not yet pay A? A: YES. Immediately arises from the time the liability of X has occur. B. Nature Sec. 97 of the Insurance Code states that: “A reinsurance is presumed to be a contract of indemnity against liability, and not merely against damage.” Sec. 98 of the Insurance Code provides that: “The original insured has no interest in a contract of reinsurance.” Q: Is reinsurance mandatory? A: General Rule: NO Exceptions: 1. Sec. 215 of the Insurance Code which provides that: “No insurance

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro company other than life, whether foreign or domestic, shall retain any risk on any one subject of insurance in an amount exceeding twenty per centum of its net worth. For purposes of this section, the term "subject of insurance" shall include all properties or risks insured by the same insurer that customarily are considered by non-life company underwriters to be subject to loss or damage from the same occurrence of any hazard insured against. Reinsurance ceded as authorized under the succeeding title shall be deducted in determining the risk retained. As to surety risk, deduction shall also be made of the amount assumed by any other company authorized to transact surety business and the value of any security mortgage, pledged, or held subject to the surety's control and for the surety's protection.” 2. Sec. 275 of the Insurance Code which provides that: “Every foreign insurance company desiring to withdraw from the Philippines shall, prior to such withdrawal, discharge its liabilities to policyholders and creditors in this country. In case of its policies insuring residents of the Philippines, it shall cause the primary liabilities under such policies to be reinsured and assumed by another insurance company authorized to transact business in the Philippines. In the case of such policies as are subject to cancellation by the withdrawing company, it may cancel such policies pursuant to the terms thereof in lieu of such reinsurance and assumption of liabilities.” C. Distinguished from double insurance Distinctions: Reinsurance Insurance of different interests Insurer becomes an insured in relation to reinsurer Original insured has no interest in reinsurance contract Subject of insurance

Double Insurance Involves same interest Insurer remains in such capacity Insured in the 1st contract is a party in interest in the 2nd contract Subject of

is the original insurer’s risk Consent of original insured, not necessary

insurance is property Insured has to give his consent

D. Duty of reinsured to disclose facts Sec. 96 of the Insurance Code provides that: “Where an insurer obtains reinsurance, except under automatic reinsurance treaties, he must communicate all the representations of the original insured, and also all the knowledge and information he possesses, whether previously or subsequently acquired, which are material to the risk.“ MARINE INSURANCE: A. Definition Marine Insurance includes policies that covers risks connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in movable property, may be exposed during a certain voyage or a fixed period of time. Basis: Sec. 99 of the Insurance Code. B. Scope of marine insurance Sec. 99 of the Insurance Code provides that: “Marine Insurance includes: (1) Insurance against loss of or damage to: (a) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects, disbursements, profits, moneys, securities, choses in action, evidences of debts, valuable papers, bottomry, and respondentia interests and all other kinds of property and interests therein, in respect to, appertaining to or in connection with any and all risks or perils of navigation, transit or transportation, or while being assembled, packed, crated, baled, compressed or similarly prepared for shipment or while awaiting shipment, or during any delays, storage, transhipment, or reshipment incident thereto, including war risks, marine builder's risks, and all personal property floater risks; (b) Person or property in connection with or appertaining to a marine, inland marine, transit or transportation insurance, including liability for loss of or damage arising out of or in connection with the construction, repair, operation, maintenance or use of the subject matter of such insurance (but not including life insurance or surety bonds nor insurance

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro against loss by reason of bodily injury to any person arising out of ownership, maintenance, or use of automobiles); (c) Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise; (d) Bridges, tunnels and other instrumentalities of transportation and communication (excluding buildings, their furniture and furnishings, fixed contents and supplies held in storage); piers, wharves, docks and slips, and other aids to navigation and transportation, including dry docks and marine railways, dams and appurtenant facilities for the control of waterways. (2) "Marine protection and indemnity insurance," meaning insurance against, or against legal liability of the insured for loss, damage, or expense incident to ownership, operation, chartering, maintenance, use, repair, or construction of any vessel, craft or instrumentality in use of ocean or inland waterways, including liability of the insured for personal injury, illness or death or for loss of or damage to the property of another person.” *In Roque v IAC, the SC held that cargo can be the subject of marine insurance, and once it is entered into, the implied warranty of seaworthiness immediately attaches to whoever is insuring the cargo, whether he be the shipowner or not. Although he has no control over the vessel, the shipper has control in the choice of vessel. C. Risks or losses covered in marine insurance 1. Perils of the sea vs. perils of the ship Perils of the Sea Include only those casualties due to the unusual violence or extraordinary causes connected with navigation. It has been said to include only such losses as are of extraordinary nature or arise from some

Perils of the Ship Is a loss which is in the ordinary course of events, results: 1. From the ordinary, natural and inevitable action of the sea; 2. From ordinary wear and tear of the ship; and

overwhelming power which cannot be guarded against by the ordinary exertion of human skill or prudence, as distinguished from the ordinary wear and tear of the voyage and from injuries suffered by the vessel in consequence of her not being unseaworthy. Extraordinary perils

3. From the negligent failure of the ship’s owner to provide the vessel with the proper equipment to convey the cargo under ordinary conditions.

Usual perils attendant to navigation *Only perils of the sea are assumed by the insurer. 2. “all risks” marine insurance policy means that all risks are covered unless expressly excepted. The burden rests on the insurer to prove that the loss is caused by a risk that is excluded. D. Insurable interest in marine insurance 1. Ship owner’s insurable interest Sec. 100 of the Insurance Code provides that: “The owner of a ship has in all cases an insurable interest in it, even when it has been chartered by one who covenants to pay him its value in case of loss: Provided, That in this case the insurer shall be liable for only that part of the loss which the insured cannot recover from the charterer.“ *The insurable interest of the shipowner is over the value of the vessel and over expected freightage. Measurement: Ownership *It does not matter whether the ship was mortgaged or chartered. a. Rule where vessel is chartered Sec. 100 of the Insurance Code states that: “The owner of a ship has in all cases an insurable interest in it, even when it has been chartered by one who covenants to pay him its value in case of loss: Provided, That in this case the insurer shall be liable for only that part of the loss which the insured cannot recover from the charterer.”

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Q: What is a charter party? A: A contract where the owner lends his whole vessel to a charterer for a particular voyage. *Indemnity Principle applies b. Rule where vessel hypothecated by bottomry Sec. 101 of the Insurance Code which provides that: “The insurable interest of the owner of the ship hypothecated by bottomry is only the excess of its value over the amount secured by bottomry.” *Principle of Indemnity applies. Q: What is bottomry? A: it is a contract of loan which said loan is used for the repair of the vessel. The payment of which is conditional. *The owner’s insurable interest is the amount in excess of the value of the ship over the amount secured by the bottomry *Owner incurs loss due to the damage of the vessel but at the same time he receives gain due to the extinguishment of his loan obligation. c. Insurable interest in freightage Sec. 102 of the Insurance Code states that: “Freightage, in the sense of a policy of marine insurance, signifies all the benefits derived by the owner, either from the chartering of the ship or its employment for the carriage of his own goods or those of others.” Sec. 103 of the Insurance Code provides that: “The owner of a ship has an insurable interest in expected freightage which according to the ordinary and probable course of things he would have earned but for the intervention of a peril insured against or other peril incident to the voyage.” *Supposed earnings may be subject to marine insurance. 2. Charterer’s insurable Sec. 106 of the Insurance Code provides that: “The charterer of a ship has an insurable interest in it, to the extent that he is liable to be damnified by its loss.” E. Concealment 1. Meaning of concealment in marine insurance

*Definition of concealment in marine insurance is the same as what defined in Sec. 26 of the Insurance Code. *However, concealment under the marine insurance is more strict than the ordinary insurance Reason: Unpredictable risk *In marine insurance, opinions and expectations of third persons are considered, whereas in ordinary insurance as a general rule, opinions of third persons are not necessary. Exception: expert opinion. 2. Duty to communicate Sec. 107 of the Insurance Code which provides that: “In marine insurance each party is bound to communicate, in addition to what is required by section twenty-eight, all the information which he possesses, material to the risk, except such as is mentioned in Section thirty, and to state the exact and whole truth in relation to all matters that he represents, or upon inquiry discloses or assumes to disclose.” 3. Opinions or expectations of third persons Sec. 108 of the Insurance Code which provides that: “In marine insurance, information of the belief or expectation of a third person, in reference to a material fact, is material.” 4. When concealment does not vitiate the entire contract Sec. 110 of the Insurance Code states that: “A concealment in a marine insurance, in respect to any of the following matters, does not vitiate the entire contract, but merely exonerates the insurer from a loss resulting from the risk concealed: (a) The national character of the insured; (b) The liability of the thing insured to capture and detention; (c) The liability to seizure from breach of foreign laws of trade; (d) The want of necessary documents; (e) The use of false and simulated papers.” F. Representations 1. Effect of false representation by the insured Sec. 111 of the Insurance Code states that: “If a representation by a

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro person insured by a contract of marine insurance, 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 the entire contract.” 2. Effect of false representation as to expectation Sec. 112 of the Insurance Code provides that: “The eventual falsity of a representation as to expectation does not, in the absence of fraud, avoid a contract of marine insurance.” G. Implied warranties in marine insurance 1. Seaworthiness Sec. 113 of the Insurance Code provides that: “In every marine insurance upon a ship or freight, or freightage, or upon any thing which is the subject of marine insurance, a warranty is implied that the ship is seaworthy.” *Charterer is also subject to warranty on seaworthiness because he has control in the selection of the ship to be leased. *Bottomry lender is also subject to warranty on seaworthiness because he has also the control in the selection of the vessel. a. What constitutes seaworthiness Sec. 114 of the Insurance Code states that: “A ship is seaworthy when reasonably fit to perform the service and to encounter the ordinary perils of the voyage contemplated by the parties to the policy.” Q: What makes a vessel seaworthy? A: Sec. 114. Fitness of the vessel is the general test. *Warranty on the condition of the ship Example: Shipowner insured his vessel with X insurer. On the part of the insurer, the inured warrants that his vessel is ship worthy. The burden falls on the shipowner/insured of proving otherwise. *Seaworthiness depends on the transaction entered into or undertaken by the ship. Sec. 116 of the Insurance Code states that: “A warranty of

seaworthiness extends not only to the condition of the structure of the ship itself, but requires that it be properly laden, and provided with a competent master, a sufficient number of competent officers and seamen, and the requisite appurtenances and equipment, such as ballasts, cables and anchors, cordage and sails, food, water, fuel and lights, and other necessary or proper stores and implements for the voyage.” Requisites: 1. Condition of the structure of the ship 2. Properly laden and provided with a competent master 3. Sufficient number of competent officers and seamen 4. Requisite appurtenances and equipment *In Delsan Transport case, the SC held that the issuance of certificate of seaworthiness is not enough to prove seaworthiness of the ship. Example: Cargo owner insured his cargo Q: Does that implied warranty on seaworthiness apply to cargo owner? A: YES. The cargo owner has the control in the selection of the vessel where his cargoes to be shipped. Sec. 119 of the Insurance Code provides that: “A ship which is seaworthy for the purpose of an insurance upon the ship may, nevertheless, by reason of being unfitted to receive the cargo, be unseaworthy for the purpose of the insurance upon the cargo.” b. When complied with; exceptions Sec. 115 of the Insurance Code provides that: “An implied warranty of seaworthiness is complied with if the ship be seaworthy at the time of the of commencement of the risk, except in the following cases: (a) When the insurance is made for a specified length of time, the implied warranty is not complied with unless the ship be seaworthy at the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro commencement of every voyage it undertakes during that time; (Time Policy) Example: The transaction is covered for one year from January 1, 2007 to December 31, 2007. The ship will undertake 5 different voyages. The ship must be seaworthy at the commencement of each and every voyage. (b) When the insurance is upon the cargo which, by the terms of the policy, description of the voyage, or established custom of the trade, is to be transhipped at an intermediate port, the implied warranty is not complied with unless each vessel upon which the cargo is shipped, or transhipped, be seaworthy at the commencement of each particular voyage. (Cargo Policy)” Controlling: There must be transhipment *The ship must be seaworthy in each particular voyage. Sec. 117 of the Insurance Code provides that: “Where different portions of the voyage contemplated by a policy differ in respect to the things requisite to make the ship seaworthy therefor, a warranty of seaworthiness is complied with if, at the commencement of each portion, the ship is seaworthy with reference to that portion.” (Voyage Policy) *There is a single ship that completes the voyage however, the ship will undergo different degree of perils. *The ship must be seaworthy upon commencement of each level of peril. General Rule: The ship must be seaworthy at the time of the commencement of the risk. Exceptions: 1. Time policy 2. Cargo policy 3. Voyage policy *In time policy, seaworthiness commenced in every voyage.

*In voyage policy, no transhipment. The voyage has different stages to go through. Every stage of voyage the ship must be seaworthy. c. Rule where ship becomes unseaworthy in the course of the voyage Sec. 118 of the Insurance Code provides that: “When the ship becomes unseaworthy during the voyage to which an insurance relates, an unreasonable delay in repairing the defect exonerates the insurer on ship or shipowner's interest from liability from any loss arising therefrom.” 2. Warranty that necessary documents are carried Sec. 120 of the Insurance Code states that: “Where the nationality or neutrality of a ship or cargo is expressly warranted, it is implied that the ship will carry the requisite documents to show such nationality or neutrality and that it will not carry any documents which cast reasonable suspicion thereon.” 3. Warranty against improper deviation a. Meaning of deviation Sec. 123 of the Insurance Code states that: “Deviation is a departure from the course of the voyage insured, mentioned in the last two sections, or an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage.” *Deviation is either proper or improper. *There is breach of warranty if the deviation is improper. b. When proper Sec. 124 of the Insurance Code provides that: “A deviation is proper: (a) When caused by circumstances over which neither the master nor the owner of the ship has any control; (b) When necessary to comply with a warranty, or to avoid a peril, whether or not the peril is insured against; *Whether or not the peril is covered by the policy is immaterial.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro (c) When made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril; or (d) When made in good faith, for the purpose of saving human life or relieving another vessel in distress.” *Warranty is against improper deviation. *Whether or not improper deviation contributed to the loss is immaterial because there was already a breach of implied warranty. Sec. 126 of the Insurance Code states that: “An insurer is not liable for any loss happening to the thing insured subsequent to an improper deviation.” H. Loss 1. Kinds of losses a. Actual Sec. 130 of the Insurance Code provides that: “An actual total loss is cause by: (a) A total destruction of the thing insured; (b) The irretrievable loss of the thing by sinking, or by being broken up; (c) Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or (d) Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured.” Sec. 132 of the Insurance Code states that: “An actual loss may be presumed from the continued absence of a ship without being heard of. The length of time which is sufficient to raise this presumption depends on the circumstances of the case.” b. Constructive Sec. 131 of the Insurance Code provides that: “A constructive total loss is one which gives to a person insured a right to abandon, under Section one hundred thirty-nine. “ 2. Right to payment upon an actual total loss Sec. 135 of the Insurance Code states that: “Upon an actual total loss, a person insured is entitled to payment without notice of abandonment.”

3. Scope of insurance against actual total loss Sec. 137 of the Insurance Code states that: “An insurance confined in terms to an actual loss does not cover a constructive total loss, but covers any loss, which necessarily results in depriving the insured of the possession, at the port of destination, of the entire thing insured.” 4. When constructive total loss/partial loss exists Sec. 139 of the Insurance Code provides that: “A person insured by a contract of marine insurance may abandon the thing insured, or any particular portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when the cause of the loss is a peril insured against: (a) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from the peril; (b) If it is injured to such an extent as to reduce its value more than threefourths; (c) If the thing insured is a ship, and the contemplated voyage cannot be lawfully performed without incurring either an expense to the insured of more than three-fourths the value of the thing abandoned or a risk which a prudent man would not take under the circumstances; or (d) If the thing insured, being cargo or freightage, and the voyage cannot be performed, nor another ship procured by the master, within a reasonable time and with reasonable diligence, to forward the cargo, without incurring the like expense or risk mentioned in the preceding sub-paragraph. But freightage cannot in any case be abandoned unless the ship is also abandoned.” Test: The loss is more than ¾ but less than 1. *If there is partial loss, only partial can be claimed. *The extent of damage in constructive loss is so severe. *This is not automatic. *There is an option either to abandon it or to recover only the partial loss. 5. Concept of abandonment and its requisites

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Definition: Sec. 138 of the Insurance Code states that: “Abandonment, in marine insurance, is the act of the insured by which, after a constructive total loss, he declares the relinquishment to the insurer of his interest in the thing insured.” *It is necessary to abandon the surviving part of the thing. Formula: Constructive total loss + Abandonment = Total loss If there is only constructive total loss there is only partial loss. Requisites: 1. There must be an actual relinquishment by the person insured of his interest in the thing insured. 2. There must be a constructive total loss 3. The abandonment be neither partial nor conditional 4. It must be made within a reasonable time after receipt of reliable information of the loss 5. It must be factual and reasonable 6. It must be made by giving notice thereof to the insurer which may be done orally or in writing 7. The notice of abandonment must be explicit and must specify the particular cause of the abandonment *The residual part is abandoned. Reason: Principle of Indemnity *If the requisites are satisfied the insurance company cannot refuse to accept the abandonment. 6. Average 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 and cargo from the time it is loaded and the voyage commenced until it ends and the cargo unloaded. *Expenses for maritime transaction. a. Kinds of average: i. Particular Sec. 136 of the Insurance Code provides that: “Where it has been agreed that an insurance upon a particular thing, or class of things, shall be free from particular average, a marine insurer is

not liable for any particular average loss not depriving the insured of the possession, at the port of destination, of the whole of such thing, or class of things, even though it becomes entirely worthless; but such insurer is liable for his proportion of all general average loss assessed upon the thing insured.” - Includes all damages and expenses caused to the vessel or to her cargo which have not inured to the common benefit and profit of all persons interested in the vessel and her cargo. It refers to those losses which occur under such circumstances as do not entitle the unfortunate owners to receive contribution from other owners concerned in the venture as where a vessel accidentally runs aground and goes to pieces after the cargo is saved. Recourse: Go after the insurer *Stipulation exempting the insurer for a particular average loss is possible and valid. ii. General - Includes damages and expenses which are deliberately caused by the master of the vessel or upon his authority, in order to save the vessel, her cargo, or both at the same time from a real or known risk. - It must be borne equally by all of the interests concerned in the venture. b. Requisites of general average 1. There must be a common danger to the vessel or cargo 2. Part of the vessel or cargo was sacrificed deliberately

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 3. The sacrifice must be for the common safety of for the benefit of all 4. It must be made by the master or upon his authority 5. It must be successful, i.e., resulted in the saving of the vessel or cargo 6. It must be necessary c. Insurer’s liability for general average The insurer of the vessel or cargo that are saved is liable for general average contribution and not for particular average. Only the insurer of the damaged cargo or vessel is liable for particular average if covered by the policy. Q: If there is a stipulation exempting the insurer for a particular average loss, does it extend to general average loss? A: NO. Basis: Article 859 of the Code of Commerce; Article 812 of the Code of Commerce Reason: Equity Q: Are there a mandatory co-insurance in marine insurance? A: YES. Basis: Sec. 157 of the Insurance Code provides that: “A marine insurer is liable upon a partial loss, only for such proportion of the amount insured by him as the loss bears to the value of the whole interest of the insured in the property insured.” *There is a co-insurance when the property is insured for less than its value, the insured is considered a co-insurer for the difference between the amount of insurance and the value of the property. Requisites: 1. The loss is partial 2. The amount of insurance is less than the value of the property insured. Formula: Loss ------- x Insurance = Insurer’s Liability Value Example: A’s insurable interest = P500,000 Insured Amount = P300,000 Loss = P300,000 Q: Would the whole P300,000 be recovered from the insurer? A: NO. Only 180,000 will be recovered and the balance of 120,000 will be suffered by the insured as a co-insurer.

Computation: 300,000 ----------- x 300,000 = 180,000 500,000 If the loss is 500,000, the insured can recover the whole 300,000 because there is a total loss and not partial loss. *In fire insurance, there has to be an express stipulation to that effect. FIRE INSURANCE: A. Definition and scope of fire insurance Sec. 167 of the Insurance Code provides that: “As used in this Code, the term "fire insurance" shall include insurance against loss by fire, lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies.” B. Risks or losses covered Q: What are allied risks? A: lightning, windstorm, tornado or earthquake, tsunami. Q: What are direct losses? A: Direct losses are losses that pertain to the physical destruction of the thing insured. Q: What are indirect losses? A: Indirect losses pertain to consequential losses. Q: Are consequential losses compensable? A: General Rule: NO in standard fire policy Except: If there is an agreement *The liability of the insurer is to pay for direct losses only Friendly Fire – fire that burns in a place where it is supposed to burn. Hostile Fire – fire that escapes and burns in a place where it is not supposed to be. C. Effect of alteration in the thing Sec. 168 of the Insurance Code provides that: “An alteration in the use or condition of a thing insured from that to which it is limited by the policy made without the consent of the insurer, by means within the control of the insured, and increasing the risks, entitles an insurer to rescind a contract of fire insurance.” Sec. 169 of the Insurance Code states that: “An alteration in the use or condition of a thing insured from that to which it is limited by the policy, which does not

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro increase the risk, does not affect a contract of fire insurance.” Q: If the policy is silent as to the use or condition of the thing insured, are there implied warranty in fire insurance? A: General Rule: YES. The insured has the insurable interest in the thing insured. Exception: If the policy expressly provides for the use of condition of the thing insured. D. Measure of indemnity Sec. 171 of the Insurance Code provides that: “If there is no valuation in the policy, the measure of indemnity in an insurance against fire is the expense it would be to the insured at the time of the commencement of the fire to replace the thing lost or injured in the condition in which at the time of the injury; but if there is a valuation in a policy of fire insurance, the effect shall be the same as in a policy of marine insurance.” 1. Open Policy: only the expense necessary to replace the thing lost or injured in the condition it was at the time of the injury. 2. Valued Policy: the parties are bound by the valuation, in the absence of fraud or mistake. E. Co-insurance clause General Rule: Applies primarily to marine insurance. Exception: Co-insurance applies to fire insurance if expressly agreed upon. CASUALTY INSURANCE: A. Concept Sec. 174 of the Insurance Code states that: “Casualty insurance is insurance covering loss or liability arising from accident or mishap, excluding certain types of loss which by law or custom are considered as falling exclusively within the scope of other types of insurance such as fire or marine. It includes, but is not limited to, employer's liability insurance, motor vehicle liability insurance, plate glass insurance, burglary and theft insurance, personal accident and health insurance as written by non-life insurance companies, and other substantially similar kinds of insurance.” Q: What is the subject matter of the casualty insurance? A: Life, property, liability and health brought by accident.

B. Third Party Liability Insurance *Casualty insurance ay provide for third party liability in the nature of stipulation pour autrui for personal injury and even damage to property, in which case, the third party may directly sue the insurer upon the occurrence of the loss. However, the insurer is not solidarily liable with the insured or the tortfeasor for the latter’s obligation. *Insurance against specified perils which may give rise to liability on the part of the insured for claims for injuries to or damage to property of others. *If there is no stipulation in favor of third person but the insurance is an insurance against liability to third persons, any third person who might be injured may not sue the insurer. - Liable for actual loss, the third party has no direct recourse with the insurer but only to the insured. The insured has recourse to the insurer. C. Insurable interest *Insurable interest is based on the interest of the insured in the safety of persons and their property, who may maintain an action against him in case of their injury or destruction, respectively. D. Meaning of “accident” and “accidental” in casualty insurance *The terms “accident” and “accidental” as used in insurance contracts, have not acquired any technical meaning. They are construed by the courts in the ordinary and common acceptation. Thus, the terms have been taken to mean that which happens by chance or fortuitously, without intention or design, which is unexpected, unusual and unforeseen. The terms do not, without qualification, exclude events resulting in damage or loss due to fault, recklessness or negligence of third parties. *It is something that the insured did not foresee or though foreseen cannot be avoided. *Accident or not, it must be taken from the viewpoint of the victim. E. Basis and extent of insurer’s liability *The beneficiary is not designated, the proceeds will be given to the victims. *The third party has direct recourse against the insurer. The insurer is purely liable.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro SURETYSHIP: A. Definition Sec. 175 of the Insurance Code states that: “A contract of suretyship is an agreement whereby a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of a third party called the obligee. It includes official recognizances, stipulations, bonds or undertakings issued by any company by virtue of and under the provisions of Act No. 536, as amended by Act No. 2206.” B. Nature of Liability of surety Sec. 176 of the Insurance Code provides that: “The liability of the surety or sureties shall be joint and several with the obligor and shall be limited to the amount of the bond. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee.” C. Distinctions between suretyship and property insurance Suretyship Accessory contract There are three parties: surety, obligor and oblige Credit accommodation Surety can recover from principal Bond can be cancelled only with consent of obligee, Commissioner, or court Requires acceptance of obligee to be valid Risk-shifting device, premium paid being in the nature of a service fee

Property Insurance Principal Contract There are two parties: insurer and insured Contract of indemnity Insurer has no such right; only right of subrogation May be cancelled unilaterally either by insured or insurer on grounds provided by law No need of acceptance by any third party Risk-distributing device, premium paid as a ratable contribution to a common fund

LIFE INSURANCE: A. Definition Sec. 179 of provides that:

the Insurance Code “. Life insurance is

insurance on human lives and insurance appertaining thereto or connected therewith.” Sec. 180 of the Insurance Code states that: “An insurance upon life may be made payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the continuance or cessation of life. Every contract or pledge for the payment of endowments or annuities shall be considered a life insurance contract for purpose of this Code. In the absence of a judicial guardian, the father, or in the latter's absence or incapacity, the mother, or any minor, who is an insured or a beneficiary under a contract of life, health or accident insurance, may exercise, in behalf of said minor, any right under the policy, without necessity of court authority or the giving of a bond, where the interest of the minor in the particular act involved does not exceed twenty thousand pesos. Such right may include, but shall not be limited to, obtaining a policy loan, surrendering the policy, receiving the proceeds of the policy, and giving the minor's consent to any transaction on the policy.” B. Kinds of Life Insurance 1. Ordinary Life, General Life or Old Line Policy – insured pays a fixed premium every year until he dies. Surrender value after 3 years. 2. Group Life – essentially a single insurance contract that provides courage for money individuals. 3. Limited Payment Policy – insured pays premium for a limited period. If he dies within the period, his beneficiary is paid; if he outlives the period, he does not get anything. 4. Endowment Policy – pays premium for specified period. If he outlives the period, the face value of the policy is paid to him; if not, his beneficiaries receive the benefit. 5. Term Insurance – insurer pays once only, and he is insured for a specified period. If he dies within the period, his beneficiaries benefits. If he outlives the period, no person benefits from the insurance. 6. Industrial Life – life insurance entitling the insured to pay premiums weekly, or where premiums are payable monthly or oftener.

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C. Liability of insurer in case of suicide Sec. 180-A of the Insurance Code states that: “The insurer in a life insurance contract shall be liable in case of suicides only when it is committed after the policy has been in force for a period of two years from the date of its issue or of its last reinstatement, unless the policy provides a shorter period: Provided, however, That suicide committed in the state of insanity shall be compensable regardless of the date of commission.” *Recovery of the proceeds depends on the commission of the suicide. *In case of suicide, the insured may recover only after two years from the date the policy was issued or last reinstatement. *In case of suicide committed in the state of insanity, it is compensable regardless of the date of the commission. D. Right to assign life insurance policy Sec. 181 of the Insurance Code states that: “A policy of insurance upon life or health may pass by transfer, will or succession to any person, whether he has an insurable interest or not, and such person may recover upon it whatever the insured might have recovered. “ Sec. 182 of the Insurance Code states that: “Notice to an insurer of a transfer or bequest thereof is not necessary to preserve the validity of a policy of insurance upon life or health, unless thereby expressly required.“ E.

Measure of indemnity Sec. 183 of the Insurance Code states that: “Unless the interest of a person insured is susceptible of exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy.” General Rule: Life policy is always valued Exception: If the creditor insured the life of the debtor.

COMPULSORY INSURANCE:

MOTOR

VEHICLE

LIABILITY

A. Reason for the requirement Purpose: To give immediate financial assistance to victims of motor vehicle accidents and/or their dependents, especially if they are poor regardless of the financial capability of motor vehicle

owners or operators responsible for the accident sustained. Q: What is the mandatory reason for this type of insurance? A: To allow the registration or renewal of registration of any motor vehicle. B. Scope of coverage required Sec. 374 of the Insurance Code states that: “It shall be unlawful for any land transportation operator or owner of a motor vehicle to operate the same in the public highways unless there is in force in relation thereto a policy of insurance or guaranty in cash or surety bond issued in accordance with the provisions of this chapter to indemnify the death, bodily injury, and/or damage to property of a third-party or passenger, as the case may be, arising from the use thereof.” Sec. 376 of the Insurance Code states that: “The Land Transportation Commission shall not allow the registration or renewal of registration of any motor vehicle without first requiring from the land transportation operator or motor vehicle owner concerned the presentation and filing of a substantiating documentation in a form approved by the Commissioner evidencing that the policy of insurance or guaranty in cash or surety bond required by this chapter is in effect.” C. Persons subject to the requirement Sec. 377 of the Insurance Code provides that: “Every land transportation operator and every owner of a motor vehicle shall, before applying for the registration or renewal of registration of any motor vehicle, at his option, either secure an insurance policy or surety bond issued by any insurance company authorized by the Commissioner or make a cash deposit in such amount as herein required as limit of liability for purposes specified in section three hundred seventy-four. (1) In the case of a land transportation operator, the insurance guaranty in cash or surety bond shall cover liability for death or bodily injuries of third-parties and/or passengers arising out of the use of such vehicle in the amount not less than twelve thousand pesos per passenger or third party and an amount, for each of such categories, in any one accident of not less than that set forth in the following scale:

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro (a) Motor vehicles with an authorized capacity of twenty-six or more passengers: Fifty thousand pesos; (b) Motor vehicles with an authorized capacity of from twelve to twenty-five passengers: Forty thousand pesos; (c) Motor vehicles with an authorized capacity of from six to eleven passengers: Thirty thousand pesos; (d) Motor vehicles with an authorized capacity of five or less passengers: Five thousand pesos multiplied by the authorized capacity. Provided, however, That such cash deposit made to, or surety bond posted with, the Commissioner shall be resorted to by him in cases of accidents the indemnities for which to third-parties and/or passengers are not settled accordingly by the land transportation operator and, in that event, the said cash deposit shall be replenished or such surety bond shall be restored with sixty days after impairment or expiry, as the case may be, by such land transportation operator, otherwise, he shall secure the insurance policy required by this chapter. The aforesaid cash deposit may be invested by the Commissioner in readily marketable government bonds and/or securities. (2) In the case of an owner of a motor vehicle, the insurance or guaranty in cash or surety bond shall cover liability for death or injury to third parties in an amount not less than that set forth in the following scale in any one accident: I. Private Cars (a) Bantam : Twenty thousand pesos; (b) Light : Twenty thousand pesos; (c) Heavy : Thirty thousand pesos; II. Other Private Vehicles (a) Tricycles, motorcyles, and scooters : Twelve thousand pesos; (b) Vehicles with an unladen weight of 2,600 kilos or less : Twenty thousand pesos; (c) Vehicles with an unladen weight of between 2,601 kilos and 3,930 kilos : Thirty thousand pesos; (d) Vehicles with an unladen weight over 3,930 kilos : Fifty thousand pesos. The Commissioner may, if warranted, set forth schedule of indemnities for the payment of claims for death or bodily injuries with the coverages set forth herein.” D. No-Fault indemnity claim

Sec. 378 of the Insurance Code provides that: “Any claim for death or injury to any passenger or third party pursuant to the provisions of this chapter shall be paid without the necessity of proving fault or negligence of any kind; Provided, That for purposes of this section: (i) The total indemnity in respect of any person shall not exceed fifteen thousand pesos; (ii) The following proofs of loss, when submitted under oath, shall be sufficient evidence to substantiate the claim: (a) Police report of accident; and (b) Death certificate and evidence sufficient to establish the proper payee; or (c) Medical report and evidence of medical or hospital disbursement in respect of which refund is claimed; (iii) Claim may be made against one motor vehicle only. In the case of an occupant of a vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. In any other case, claim shall lie against the insurer of the directly offending vehicle. 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.“ Q: How does the law protects the victim? A: By the provision under the NO FAULT INDEMNITY CLAUSE. *No fault clause applies only to bodily physical injuries or death not to property damage. Q: From whom should the injured recover? A: (a) In the case of an occupant of a vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from; (b) If not an occupant, claim shall lie against 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. Examples: a. A passenger rode Y taxi cab. The taxi cab is insured by X company under the compulsory motor vehicle liability insurance. The taxi collided against a MERALCO post.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro The passenger can claim against X company without proving fault or negligence. Only documents that prove the happening of the incident. b. Passenger 1 received P15,000 under the no fault clause. His actual expenses amount to P50,000. Q: Can he still recover the balance? From whom? A: YES. Against the offending vehicle but this time he is required to prove fault or negligence. E. Notice of claim Sec. 384 of the Insurance Code states that: “Any person having any claim upon the policy issued pursuant to this Chapter shall, without any unnecessary delay, present to the insurance company concerned a written notice of claim setting forth the nature, extent and duration of the injuries sustained as certified by a duly licensed physician. Notice of claim must be filed within six months from date of accident, otherwise, the claim shall be deemed waived. Action or suit for recovery of damage due to loss or injury must be brought, in proper cases, with the Commissioner or the Courts within one year from denial of the claim, otherwise, the claimant's right of action shall prescribe.” CLAIMS SETTLEMENT: A. Unfair claim settlement practices Sec. 241 of the Insurance Code states that: “(1) No insurance company doing business in the Philippines shall refuse, without just cause, to pay or settle claims arising under coverages provided by its policies, nor shall any such company engage in unfair claim settlement practices. Any of the following acts by an insurance company, if committed without just cause and performed with such frequency as to indicate a general business practice, shall constitute unfair claim settlement practices: (a) knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverage at issue; (b) failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies; (c) failing to adopt and implement reasonable standards for the prompt

investigation of claims arising under its policies; (d) not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear; or (e) compelling policyholders to institute suits to recover amounts due under its policies by offering without justifiable reason substantially less than the amounts ultimately recovered in suits brought by them. (2) Evidence as to numbers and types of valid and justifiable complaints to the Commissioner against an insurance company, and the Commissioner's complaint experience with other insurance companies writing similar lines of insurance shall be admissible in evidence in an administrative or judicial proceeding brought under this section. (3) If it is found, after notice and an opportunity to be heard, that an insurance company has violated this section, each instance of non-compliance with paragraph (1) may be treated as a separate violation of this section and shall be considered sufficient cause for the suspension or revocation of the company's certificate of authority.” General Rule: Upon maturity of the policy Exception: Annuities payment B. Claims for life insurance policies Sec. 242 of the Insurance Code provides that: “The proceeds of a life insurance policy shall be paid immediately upon maturity of the policy, unless such proceeds are made payable in installments or as an annuity, in which case the installments, or annuities shall be paid as they become due: Provided, however, That in the case of a policy maturing by the death of the insured, the proceeds thereof shall be paid within sixty days after presentation of the claim and filing of the proof of the death of the insured. Refusal or failure to pay the claim within the time prescribed herein will entitle the beneficiary to collect interest on the proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is based on the ground that the claim is fraudulent.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro The proceeds of the policy maturing by the death of the insured payable to the beneficiary shall include the discounted value of all premiums paid in advance of their due dates, but are not due and payable at maturity.” C. Claims for non-life insurance policies Sec. 243 of the Insurance Code states that: “The amount of any loss or damage for which an insurer may be liable, under any policy other than life insurance policy, shall be paid within thirty days after proof loss is received by the insurer and ascertainment of the loss or damage is made either by agreement between the insured and the insurer or by arbitration; but if such ascertainment is not had or made within sixty days after such receipt by the insurer of the proof of loss, then the loss or damage shall be paid within ninety days after such receipt. Refusal or failure to pay the loss or damage within the time prescribed herein will entitle the assured to collect interest on the proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is based on the ground that the claim is fraudulent.” D. Delay in payment of claims Sec. 244 of the Insurance Code provides that: “In case of any litigation for the enforcement of any policy or contract of insurance, it shall be the duty of the Commissioner or the Court, as the case may be, to make a finding as to whether the payment of the claim of the insured has been unreasonably denied or withheld; and in the affirmative case, the insurance company shall be adjudged to pay damages which shall consist of attorney's fees and other expenses incurred by the insured person by reason of such unreasonable denial or withholding of payment plus interest of twice the ceiling prescribed by the Monetary Board of the amount of the claim due the insured, from the date following the time prescribed in section two hundred fortytwo or in section two hundred forty-three, as the case may be, until the claim is fully satisfied; Provided, That the failure to pay any such claim within the time prescribed in said sections shall be considered prima

facie evidence of unreasonable delay in payment.”

TRANSPORTATION LAW PRELIMINARY CONSIDERATIONS: A. Governing Laws 1. New Civil Code – Primary law 2. Warsaw Convention – for international transportation by air 3. Code of Commerce – governs suppletorily; it governs maritime transaction 4. Carriage of Goods by Sea Act – for transportation by sea; governs suppletorily 5. Salvage Law 6. Public Service Act 7. Article XII Sec 11 on operation of public convenience of the 1987 Philippine Constitution B. Concept of Public Utility & public service Sec. 13 (b) of the Public Service Act provides that: “The term 'public service' includes every person that now or hereafter may own, operate, manage, or control in the Philippines, for hire or compensation, with general or limited clientele, whether permanent, occasional or accidental, and done for general business purposes, any common carrier, railroad, street railway, traction railway, sub-way motor vehicle, either for freight or passenger, or both with or without fixed route and whatever may be its classification, freight or carrier service of any class, express service, steamboat, or steamship line, pontines, ferries, and water craft, engaged in the transportation of passengers or freight or both, shipyard, marine railway, marine repair shop, wharf or dock, ice plant, ice-refrigeration plant, canal, irrigation system, gas electric light, heat and power, water supply and power, petroleum, sewerage system, wire or

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro wireless communications system, wire or wireless broadcasting stations and other similar public services: Provided, however, That a person engaged in agriculture, not otherwise a public service, who owns a motor vehicle and uses it personally and/or enters into a special contract whereby said motor vehicle is offered for hire or compensation to a third party or third engaged in agriculture, not itself or themselves a public service, for operation by the latter for a limited time and for a specific purpose directly connected with the cultivation of his or their farm, the transportation, processing, and marketing of agricultural products of such third party or third parties shall not be considered as operating a public service for the purposes of this Act.” Public utilities are privately owned and operated business whose services are essential to the general public. Case: National Development Company v CA C. Constitutional limitations on operation of public utilities Sec. 11 of Article XII of the 1987 Constitution states that: “No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.” *The corporation must be a domestic corporation and that 60% of the capital must be owned by Filipino citizens.

Sec. 18 of Article XII of the 1987 Constitution provides that: “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.” Q: What are the bases/reasons for regulation of public utilities? A: Basis: Police Power Justification: Common good D. Regulatory agencies 1. Land Transportation Franchising Regulatory Board (LTFRB) – land transportation 2. Land Transportation Office – issue license to drivers 3. Maritime Industry Authority (MARINA) – water transportation 4. National Telecommunications Commission – communication utilities and services, radio communications systems, wire or wireless telephone and telegraph systems, radio and television broadcasting systems and other similar public utilities 5. Energy Regulatory Board – electric or power companies 6. National Water Resources Council – water resources 7. Civil Aeronautics Board – air transportation Q: What conditions must concur in the grant of certificate of public convenience and necessity? A: 1. The grantee must be a citizen of the Philippines or a corporation or entity 60% 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 interest and convenience in a proper and suitable manner. *In Tatad v Garcia, the SC held that the controlling factor is the citizenship of the person operating a common carrier. Guiding Principles: 1. Prior or Old Operator Rule – the first licensee will be protected in his investment and will not be subjected to ruinous competition. *No certificate of public convenience and necessity will be issued to other operator as long as the prior operator still in operation and can satisfy the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro public and that it still has the capacity to do so. 2. Protection Investment Rule – protects from unfair competition 3. Prior Applicant Rule – protects the first applicant. Principle: all things being equal *Public interest is the first and paramount consideration. E. Concept of franchise and certificate of public convenience Franchise is a grant or privilege from the sovereign power. Certificate of Public Convenience is a form of regulation through an administrative agency. Q: Is a legislative franchise necessary before a public utility can be allowed to secure a certificate of public convenience? A: General Rule: NO. Exception: If a pertinent law requires such legislative franchise. Factors: 1. Public interest 2. Public convenience 3. Public necessity GENERAL CONCEPTS: A. Contract of transportation in general Transportation is a contract whereby a person, natural or juridical, obligates to transport persons, goods, or both, from one place to another, by land, air, or water, for a price or commission. *Importance: For liability purposes B. Perfection There is a perfected contract when there was a meeting of the minds as to the subject matter and consideration. C. Common Carrier 1. Statutory definition Article 1732 of the New Civil Code provides that: “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.” - one that holds itself out as ready to engage in the transportation of goods for hire as a public employment and not as a casual occupation.

Implications being a common carrier: a. extraordinary diligence must be exercised b. in case of damage, presumption of negligence on the part of the common carrier *It is the activity of the carrier that is controlling. Cases: A.F. Sanchez Brokerage, Inc v CA; Asia Lighterage v CA; De Guzman v CA *The fact that there is no license at the time of the incident happen is of no moment for liability purposes. 2. Distinguished from private carrier Common Private Carrier Carrier As to holds Contracts availabilit himself out with y: for all particular people individual indiscriminat s or ely groups only As to Extraordinar Ordinary required y diligence diligence diligence: is required is required As to Subject to Not regulatio state subject to n: regulation state regulation Stipulatio Parties may Parties n limiting not agree on may limit liability: limiting the the carrier’s carrier’s liability liability, except when provided provided by it is not law contrary to law, morals or good customs Exemptin Prove Caso g extraordinar fortuito, circumsta y diligence Article nce: and Article 1174 NCC 1734 NCC Presumpti There is a No on of presumption presumpti Negligenc of fault or on of fault e: negligence or negligenc e Governing Law on Law on law: common obligation carriers s and contracts 3. Distinguished from arrastre and stevedoring

towage,

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Distinctions: Towage

Arrastre

Stevedor ing

One vessel The The is hired to functions of function bring an arrastre of another operator has stevedore vessel to nothing to s involves another do with the the place; trade and loading refers to a business of and service navigation, unloading rendered to nor to the of a vessel by use or coastwise towing for operation of vessels the mere vessels. He calling at purpose of is no the port. expediting different her voyage from that of without a depositary reference or to any warehousem circumstan an. ces of danger. *The SC held that the following services are not considered a common carrier: 1) purely arrastre services; *comparable to that as warehouseman and depositor 2) purely stevedoring services; and 3) purely towage services. *In Crisostomo v CA, the SC held that the respondent being a travel agency is not a common carrier because the services offered is not one that carries passenger from one place to another. 4. Tests to determine common carrier Tests: a. He must 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 person generally as a business and not as a casual occupation; b. He must undertake to carry goods of the kind to which his business is confined; c. He must undertake to carry by the method by which his business is conducted and over his established roads; d. The transportation must be for hire Case: First Philippine Industrial Corporation v CA *Under Sec. 22 of the Electric Power Distribution Reform Act, the

company like MERALCO distributing electricity is a common carrier. 5. Parties to the contract of carriage a. Carriage of passengers: 1. Common carrier 2. Passengers b. Carriage of goods: 1. Shipper 2. Carrier D. Registered owner rule and Kabit system General Rule: Registered owner rule is applicable in this jurisdiction. Registered owner rule states that the person who is the registered owner of a vehicle is liable for any damages caused by the negligent operation of the vehicle although the same was already sold or conveyed to another person at the time of the accident. The registered owner is liable to the injured party subject to his right of recourse against the transferee or the buyer. Purpose of this rule: easy identification of the owner to be sued for liability. Recourse: Registered owner may bring the case to the court to sue the buyer or operator of the vehicle at fault. Exception: in case of stolen vehicle registered owner is not liable. *In the case of Duavit v CA, the SC held that the registered owner is not liable if the vehicle was taken from his garage without his knowledge or consent. To hold the registered owner liable would be absurd as it would be holding liable the owner of a stolen vehicle for an accident caused by the person who stole such vehicle. Kabit System is an arrangement whereby a person who has been granted a certificate of public convenience allows other persons who own motor vehicles to operate them under his license, sometimes for a fee or percentage of the earnings. *Kabit system is invariably recognized as being contrary to public policy and therefore void and inexistent under Article 1409 of the New Civil Code. *If the registered owner and the buyer entered into this transaction they are In pari delicto thus, in case something happen the court will not aid them. The court will leave them as they were. *This arrangement is a circumvention of the requirement for license.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro OBLIGATIONS OF THE COMMON CARRIER IN A CONTRACT OF CARRIAGE OF GOODS: A. Vigilance over the goods 1. Duty to exercise extraordinary diligence Article 1733 of the New Civil Code states that: “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. Such extraordinary diligence in the vigilance over the goods is further expressed in Articles 1734, 1735, and 1745, Nos. 5, 6, and 7, while the extraordinary diligence for the safety of the passengers is further set forth in Articles 1755 and 1756.” Reason: The nature of the business is imbued with public interest and public policy; because of the exigencies of the business. The public has no choice but to trust on the skills of the employees of the common carrier. The goods and the life of the passenger are placed in the hands of the common carrier. Article 363 of the Code of Commerce provides that: “Outside of the cases mentioned in the second paragraph of Article 361, the carrier shall be obliged to deliver the goods shipped in the same condition in which, according to the bill of lading, they were found at the time they were received, without any damage or impairment, and failing to do so, to pay the value which those not delivered may have at the point and at the time at which their delivery should have been made. If those not delivered form part of the goods transported, the consignee may refuse to receive the latter, when he proves that he cannot make use of them independently of the others.” Article 364 of the Code of Commerce provides that: “If the effect of the damage referred to in Article 361 is merely a diminution in the value of the gods, the obligation of the carrier shall be reduced to the payment of the amount which, in the

judgment of experts, constitutes such difference in value.” Article 365 of the Code of Commerce provides that: “If, in consequence of the damage, the goods are rendered useless for sale and consumption for the purposes for which they are properly destined, the consignee shall not be bound to receive them, and he may have them in the hands of the carrier, demanding of the latter their value at the current price on that day. If among the damaged goods there should be some pieces in good condition and without any defect, the foregoing provision shall be applicable with respect to those damaged and the consignee shall receive those which are sound, this segregation to be made by distinct and separate pieces and without dividing a single object, unless the consignee proves that impossibility of conveniently making use of them in this form. The same rule shall be applied to merchandise in bales or packages, separating those parcels which appear sound.” Presumption of negligence Article 1735 of the New Civil Code provides that: “In all cases other than those mentioned in Nos. 1, 2, 3, 4, and 5 of the preceding article, if the goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as required in Article 1733.” 2. Duration of liability Article 1736 of the New Civil Code states that: “The extraordinary responsibility of the common carrier lasts from the time the goods are unconditionally placed in the possession of, and received by the carrier for transportation until the same are delivered, actually or constructively, by the carrier to the consignee, or to the person who has a right to receive them, without prejudice to the provisions of Article 1738.” Article 1737 of the New Civil Code states that: “The common carrier's duty to observe extraordinary diligence over the goods remains in full

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro force and effect even when they are temporarily unloaded or stored in transit, unless the shipper or owner has made use of the right of stoppage in transitu.” Article 1738 of the New Civil Code provides that: “The extraordinary liability of the common carrier continues to be operative even during the time the goods are stored in a warehouse of the carrier at the place of destination, until the consignee has been advised of the arrival of the goods and has had reasonable opportunity thereafter to remove them or otherwise dispose of them.” 3. Defenses of common carriers Article 1734 of the New Civil Code provides that: “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 of 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.” *The enumeration is exclusive or a closed list. General Rule: Common carriers are responsible for the loss, destruction or deterioration of the goods. Exceptions: 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 of omission of the shipper or owner of the goods; 4. The character of the goods or defects in the packaging or in the containers; and 5. Order or act of the competent public authority Article 1740 of the New Civil Code states that: “If the common carrier negligently incurs in delay in transporting the goods, a natural disaster shall not free such carrier from responsibility.” a. Fortuitous event

Article 1739 of the New Civil Code provides that: “In order that the common carrier may be exempted from responsibility, the natural disaster must have been the proximate and only cause of the loss. However, the common carrier must exercise due diligence to prevent or minimize loss before, during and after the occurrence of flood, storm or other natural disaster in order that the common carrier may be exempted from liability for the loss, destruction, or deterioration of the goods. The same duty is incumbent upon the common carrier in case of an act of the public enemy referred to in Article 1734, No. 2.” *Fire is not within the ambit of natural disaster or calamity. *Calamity includes thunderstorm. *mechanical defect is not within the ambit of the natural disaster; it is within the control of the common carrier. Requisites: 1. Proximate cause is the natural calamity 2. Absence of negligence on the part of the common carrier 3. The common carrier must exercise due diligence to prevent loss before, during and after the occurrence of the disaster 4. Free from unreasonable delay by the common carrier or unreasonable deviation b. Public enemy Article 1739 of the New Civil Code states that: “In order that the common carrier may be exempted from responsibility, the natural disaster must have been the proximate and only cause of the loss. However, the common carrier must exercise due diligence to prevent or minimize loss before, during and after the occurrence of flood, storm or other natural disaster in order that the common carrier may be exempted from liability for the loss, destruction, or deterioration of the goods. The same duty is incumbent upon the common carrier in case of an act of

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro the public enemy referred to in Article 1734, No. 2.” *Public enemy includes pirates however it does not include robbery and thief. *Pirates are enemies of all civilized nation. General Rule: rebels and insurreccion is not included. Exception: If it they are cast of and took allegiance a hostile manner territory *Existence of actual war is imperative. c. Act of omission on the part of the shipper or owner of the goods *There must be no fault or contributory negligence on the part of the carrier. *In Compania Maritima v CA, the SC held that the common carrier is also at fault; the common carrier should have exercise extraordinary diligence by not relying solely on the statement of the shipper; it should have conducted its own weighing. In this case the common carrier is not totally absolved from its liability. d. Improper packing Article 1742 of the New Civil Code states that: “Even if the loss, destruction, or deterioration of the goods should be caused by the character of the 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.” *If the defect is apparent, the carrier may refuse to accept the goods for carriage; if the shipper insists, the remedy is to make a protestation; make a foul bill of lading. *In Iron Bulk v CA (Dec. 8, 2003), carrier issued pro forma bill of lading stated where in that it accepted goods in good condition. The goods arrived defective. The SC held that the carrier is not exempt from liability because it accepted the goods without protestation. *Foul Bill of Lading preserves the right of the carrier to use the excuse provided in 1734.

e. Order of public authority Article 1743 of the New Civil Code states that: “If through the order of public authority the goods are seized or destroyed, the common carrier is not responsible, provided said public authority had power to issue the order.” *The important requisite is that the public authority has the power to issue an order. Case: Ganzon v CA 4. Contributory negligence of the shipper Article 1741 of the New Civil Code states that: “If the shipper or owner merely contributed to the loss, destruction or deterioration of the goods, the proximate cause thereof being the negligence of the common carrier, the latter shall be liable in damages, which however, shall be equitably reduced.” 5. Stipulation limiting liability of carrier Article 1744 of the New Civil Code states that: “A stipulation between the common carrier and the shipper or owner limiting the liability of the former for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence shall be valid, provided it be: (1) In writing, signed by the shipper or owner; (2) Supported by a valuable consideration other than the service rendered by the common carrier; and (3) Reasonable, just and not contrary to public policy.” *This is for the benefit of the carrier. Consideration: Reduction of fare *The stipulation must be in writing for the purpose of preventing abuse from the carrier. Article 1748 of the New Civil Code provides that: “An agreement limiting the common carrier's liability for delay on account of strikes or riots is valid.” Article 1749 of the New Civil Code states that: “A stipulation that the common carrier's liability is limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding.” Article 1750 of the New Civil Code provides that: “A contract fixing the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the goods is valid, if it is reasonable and just under the circumstances, and has been fairly and freely agreed upon.” a. Requisites Article 1744 of the New Civil Code states that: “A stipulation between the common carrier and the shipper or owner limiting the liability of the former for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence shall be valid, provided it be: (1) In writing, signed by the shipper or owner; (2) Supported by a valuable consideration other than the service rendered by the common carrier; and (3) Reasonable, just and not contrary to public policy.” Article 1751 of the New Civil Code provides that: “The fact that the common carrier has no competitor along the line or route, or a part thereof, to which the contract refers shall be taken into consideration on the question of whether or not a stipulation limiting the common carrier's liability is reasonable, just and in consonance with public policy.” *Liability can be limited but cannot be totally exempted. *Stipulations reducing diligence or limiting liability must be in writing to be enforceable. b. Invalid stipulations Article 1745 of the New Civil Code states that: “Any of the following or similar stipulations shall be considered unreasonable, unjust and contrary to public policy: (1) That the goods are transported at the risk of the owner or shipper; (2) That the common carrier will not be liable for any loss, destruction, or deterioration 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 less than that of a good father of a

family, or of a man of ordinary prudence in the vigilance over the movables transported; (5) That the common carrier shall not be responsible for the acts or omission of his or its employees; (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.” *Even if they agreed with regard to numbers 1,2 and 3, the stipulation is void because it is contrary to public policy because all these stipulations exempt the carrier from liability. General Rule: The degree of diligence may be lowered Exception: Not lower than that of a good father of a family. General Rule: stipulations exempting from liability acts committed by robbers and thieves who do not act with grave threat or irresistible threats are not valid. Exception: In case the robbers or thieves used grave threat or irresistible threats. *In this case, the presumption of negligence is still applicable, the stipulation only affects the outcome of the case. c. Effect of delay Article 1747 of the New Civil Code states that: “If the common carrier, without just cause, delays the transportation of the goods or changes the stipulated or usual route, the contract limiting the common carrier's liability cannot be availed of in case of the loss, destruction, or deterioration of the goods.” *Delay will prevent the carrier from raising natural disaster as a defense and that the agreement limiting its liability cannot be raised as a defense.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro d. Rule on presumption of negligence despite stipulation Article 1752 of the New Civil Code states that: “Even when there is an agreement limiting the liability of the common carrier in the vigilance over the goods, the common carrier is disputably presumed to have been negligent in case of their loss, destruction or deterioration.” B. Other obligations 1. Duty to accept goods a. Grounds for valid refusal to accept goods i. General Rule: Goods sought to be transported are dangerous objects or substances including dynamite and other explosives; Exception: Carriers that are permitted or allowed to transport dangerous objects or substances for the reason that it is their function to do so or it is their operation. ii. Goods are unfit for transportation; *This can be found under Article 356 of the Code of Commerce iii. Acceptance would result in overloading; iv. Contrabands or illegal goods; v. Goods are injurious to health; vi. Goods will be exposed to untoward danger like flood, capture by enemies and the like; vii. Goods like livestock will be exposed to disease; viii.Strike; and ix. Failure to tender goods on time 2. Duty to deliver goods a. Time of delivery General Rule: It is by stipulation Exception: In the absence of stipulation Code of Commerce governs. Article 358 of the Code of Commerce provides that: “If there is no period fixed for the delivery of the goods the carrier shall be bound to forward them in the first shipment of the same or similar goods which he may make to the point where he must deliver them; and should he not do so, the damages caused by the delay should be for his account.”

*When a common carrier undertakes to convey goods, the law implies a contract that they shall be delivered at destination within a reasonable time, in the absence of any agreement as to the time of delivery. *Mercantile usage or practice With stipulation Carrier is bound to fulfil the contract and is liable for any delay; no matter from what cause it may have arisen

Without stipulation 1. Within a reasonable time. 2. Carrier is bound to forward them in the first shipment of the same or similar goods which he may make to the point of delivery

b. Consequences of delay Article 1740 of the New Civil Code provides that: “If the common carrier negligently incurs in delay in transporting the goods, a natural disaster shall not free such carrier from responsibility.” Article 1747 of the New Civil Code provides that: “If the common carrier, without just cause, delays the transportation of the goods or changes the stipulated or usual route, the contract limiting the common carrier's liability cannot be availed of in case of the loss, destruction, or deterioration of the goods.” Article 370 of the Code of Commerce provides that: “If a period has been fixed for the delivery of the goods, it must be made within such time, and, for failure to do so, the carrier shall pay the indemnity stipulated in the bill of lading, neither the shipper nor the consignee being entitled to anything else. If no indemnity has been stipulated and the delay exceeds the time fixed in the bill of lading, the carrier shall be liable for

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro the damages which the delay may have caused.” Article 371 of the Code of Commerce provides that: “In case of delay through the fault of the carrier, referred to in the preceding articles, the consignee may leave the goods transported in the hands of the former, advising him thereof in writing before their arrival at the point of destination. When this abandonment takes place, the carrier shall pay the full value of the goods as if they had been lost or mislaid. If the abandonment is not made, the indemnification for losses and damages by reason of the delay cannot exceed the current price which the goods transported would have had on the day and at the place in which they should have been delivered; this same rule is to be observed in all other cases in which this indemnity may be due.” Article 372 of the Code of Commerce states that: “The value of the goods which the carrier must pay in cases of loss or misplacement shall be determined in accordance with that declared in the bill of lading, the shipper not being allowed to present proof that among the goods declared therein there were articles of greater value and money. Horses, vehicles, vessels, equipment and all other principal and accessory means of transportation shall be especially bound in favour of the shipper, although with respect to railroads said liability shall be subordinated to the provisions of the laws of concession with respect to the property, and to what this Code established as to the manner and form of effecting seizures and attachments against said companies.” Article 373 of the Code of Commerce states that: “The carrier who makes the delivery of the merchandise to the consignee by virtue of combined agreements or services with other carriers shall assume the obligations of those who preceded him in the

conveyance, reserving his right to proceed against the latter if he was not the party directly responsible for the fault which gave rise to the claim of the shipper or consignee. The carrier who makes the delivery shall likewise acquire all the actins and rights of those who preceded him in the conveyance. The shipper and the consignee shall have an immediate right of action against the carrier who executed the transportation contract, or against the other carriers who may have received the goods transported without reservation. However, the reservation made by the latter shall not relieve them from the responsibilities which they may have incurred by their own acts.” Article 374 of the Code of Commerce states that: “The consignees to whom the shipment was made may not defer the payment of the expenses and transportation charges of the goods they receive after the lapse of 24 hours following their delivery; and in case of delay in this payment, the carrier may demand the judicial sale of the goods transported in an amount necessary to cover the cost of transportation and the expenses incurred.” Effects of delay: 1. Excusable delay in carriage merely suspends and generally does not terminate the contract of carriage. When the cause is removed, the master must proceed with the voyage and make delivery; 2. Carrier remains duty bound to exercise extraordinary diligence; 3. Natural disaster shall not free the carrier from responsibility; 4. If delay is without just cause, the contract limiting the common carrier’s liability cannot be availed of in case of loss or deterioration of the goods. c. Place of Delivery Article 360 of the Code of Commerce provides that: “The shipper, without changing the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro place where the delivery is to be made, may change the consignment of the goods which he delivered to the carrier, provided that at the time of ordering the change of consignee the bill of lading signed by the carrier, if one has been issued, be returned to him, in exchange for another wherein the novation of the contract appears. The expenses which this change of consignment occasions shall be for the account of the shipper.” d. To whom delivery shall be made Article 368 of the Code of Commerce provides that: “The carrier must deliver to the consignee, without any delay or obstruction, the goods which he may have received, by the mere fact of being named in the bill of lading to receive them; and if he does not do so, he shall be liable for the damages which may be caused thereby.” Article 369 of the Code of Commerce provides that: “If the consignee cannot be found at the residence indicated in the bill of lading, or if he refuses to pay the transportation charges and expenses, or if he refuses to receive the goods, the municipal judge, where there is none of the first instance, shall provides for their deposit at the disposal of the shipper, this deposit producing all the effects of delivery without prejudice to third parties with a better right.” OBLIGATIONS OF THE COMMON CARRIER IN A CONTRACT OF CARRIAGE OF PASSENGERS: A. Safety of Passengers 1. Duty to observe utmost diligence Article 1755 of the New Civil Code provides that: “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.” *There are claims not really focused on death, injuries, loss or damage of goods but concentrates on moral

damages; and the SC said that these claims can still prosper in because there is still a breach of contract of carriage. *Behavior of the employees towards to passengers is also a factor considered by the court to rule against a common carrier. *In CAL v PAL, the SC held that hijacking of the airplane is considered to be a force majeure thus cannot held the carrier liable. Case: Singapore Airline v Andion Fernandez *In Japan Airlines v Asuncion (January 28, 2005), the SC held that the things invoked by the respondent do not fall within the ambit of extraordinary diligence. Though it is the duty of the carrier to check that travel documents are with the passengers but it is not under the obligation of the carrier to check the veracity of the information in the travel document; it also held that the obligation of the carrier is limited to endorsing and not to influence. The issue of whether or not an alien be admitted entrance to a country is a sovereign act and such cannot be interfered by the petitioner. 2. Duration of liability *The carrier is bound to exercise utmost diligence with respect to passengers the moment the person who purchases the ticket or token from the carrier presents himself at the proper place and in a proper manner to be transported. Such person must have a bona fide intention to use the facilities of the carrier, possess sufficient fare with which to pay for his passage, and present himself to the carrier for transportation in the place and manner provided. *In LRTA v Navidad, the SC held the petitioner carrier liable for breach of contract. The SC held that Nicanor Navidad was a passenger when he died after he fell on the LRT tracks and was struck by a moving train. He was considered a passenger because he entered the LRT station after having purchased a token and he fell while he was on the platform waiting for a train. Thus, he was where he was supposed

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro to be with the intention of boarding a train. *Once created, the relationship will not ordinarily terminate until the passenger has, after reaching his destination, safely alighted from the carrier’s conveyance or has had a reasonable opportunity to leave the carrier’s premises. All persons who remain on the premises within a reasonable time after leaving the conveyance are to be deemed passengers, and what is a reasonable time or a reasonable delay within this rule is to be determined from all the circumstances, and includes reasonable time to look after his baggage and prepare for his departure. *In La Mallorca v CA, the SC held that there was a breach of duty to exercise extraordinary diligence with respect to the 4 year old child and the carrier is liable as a consequence. The presence of passengers near the bus was not unreasonable and they were, therefore, to be considered still as passengers of the carrier, entitled to the protection under their contract. *In Aboitiz Shipping Corporation v CA, the SC held that extraordinary diligence was still owed to AV at the time of the accident. It was ruled that AV’s presence in the premises was not without cause. The victim had to claim his baggage which was possible only one hour after the vessel arrived since it was the standard procedure in the case of petitioner’s vessels that the unloading operation shall start only after that time. *The differences between the La Mallorca case and Aboitiz Shipping Corporation are: 1. The business is different from that of La Mallorca case; and 2. The capacity of passengers and baggages are different 3. Presumption of negligence Article 1756 of the New Civil Code states that: “In case of death of or injuries to passengers, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as prescribed in Articles 1733 and 1755.” 4. Liability for acts of employees

Article 1759 of the New Civil Code provides that: “Common carriers are liable for the death of or injuries to passengers through the negligence or wilful acts of the former's employees, although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers. This liability of the common carriers does not cease upon proof that they exercised all the diligence of a good father of a family in the selection and supervision of their employees.” Case: Maranan v Perez 5. Liability for acts of strangers Article 1763 of the New Civil Code provides that: “A common carrier is responsible for injuries suffered by a passenger on account of the wilful acts or negligence of other passengers or of strangers, if the common carrier's employees through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission. “ Case: Bachelor Express v CA 6. Effect of stipulation on liability Article 1757 of the New Civil Code provides that: “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.” Article 1758 of the New Civil Code provides that: “When a passenger is carried gratuitously, a stipulation limiting the common carrier's liability for negligence is valid, but not for wilful acts or gross negligence. The reduction of fare does not justify any limitation of the common carrier's liability.” Article 1760 of the New Civil Code states that: “The common carrier's responsibility prescribed in the preceding article cannot be eliminated or limited by stipulation, by the posting of notices, by statements on the tickets or otherwise.” B. Passenger’s Baggages Article 1754 of the New Civil Code provides that: “The provisions of Articles 1733 to 1753 shall apply to the passenger's baggage which is not in his

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 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 hotelkeepers shall be applicable.” Article 1998 of the New Civil Code states that: “The deposit of effects made by the travellers in hotels or inns shall also be regarded as necessary. The keepers of hotels or inns shall be responsible for them as depositaries, provided that notice was given to them, or to their employees, of the effects brought by the guests and that, on the part of the latter, they take the precautions which said hotel-keepers or their substitutes advised relative to the care and vigilance of their effects.” Article 2000 of the New Civil Code states that: “The responsibility referred to in the two preceding articles shall include the loss of, or injury to the personal property of the guests caused by the servants or employees of the keepers of hotels or inns as well as strangers; but not that which may proceed from any force majeure. The fact that travellers are constrained to rely on the vigilance of the keeper of the hotels or inns shall be considered in determining the degree of care required of him.” Article 2001 of the New Civil Code provides that: “The act of a thief or robber, who has entered the hotel is not deemed force majeure, unless it is done with the use of arms or through an irresistible force.” Article 2002 of the New Civil Code provides that: “The hotel-keeper is not liable for compensation if the loss is due to the acts of the guest, his family, servants or visitors, or if the loss arises from the character of the things brought into the hotel.” Article 2003 of the New Civil Code provides that: “The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotel-keeper and the guest whereby the responsibility of the former as set forth in articles 1998 to 2001 is suppressed or diminished shall be void.” *The baggage in the personal custody of the passenger or his employee in that the baggage in transit will be considered as necessary deposits. The common carrier

shall be responsible for the baggage as depositaries, provided that notice was given to them or its employees, and the passenger took the necessary precaution, which the carrier has advised them relative to the care and vigilance of their baggage. In case of loss due to the fault of the passenger the carrier will not be liable. *They are not absolutely responsible as depository because the law requires notice. *It is also required to declare the value of the baggage. *The carrier who has in his custody the baggage of the passenger to be carried like any other goods is required to observe extraordinary diligence. In case of loss or damage the carrier is presumed negligent. OBLIGATIONS OF THE SHIPPER, CONSIGNEE AND PASSENGER: A. Effect of negligence of shipper or passenger Article 1741 of the New Civil Code states that: “If the shipper or owner merely contributed to the loss, destruction or deterioration of the goods, the proximate cause thereof being the negligence of the common carrier, the latter shall be liable in damages, which however, shall be equitably reduced.” Article 1761 of the New Civil Code provides that: “The passenger must observe the diligence of a good father of a family to avoid injury to himself.” Article 1762 of the New Civil Code states that: “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.” *The shipper is also obliged to exercise due diligence in avoiding damage or injury. *With respect to carriage of passengers, the said passengers are likewise bound to observe due diligence to avoid injury. *The contributory negligence on the part of the passenger is not a defense that will excuse the carrier from liability. It will only mitigate such liability. *The carrier may be able to prove that the only cause of the loss of the goods is any of the following acts of the shipper: 1. failure of the shipper to disclose the nature of the goods;

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro 2. improper marking or direction as to destination; and 3. improper loading when he assumed such responsibility. *The shipper must likewise see to it that the goods are properly packed; otherwise, liability of the carrier may be mitigated or barred depending on the circumstances. B. Payment of freight Who will pay: Shipper - before or at the time he delivers the goods to the carrier for shipment. Consignee - if agreed upon by the parties at the point of destination is bound by such stipulation the moment he accepts the goods. Passengers - they are contractually bound to pay the fare within such time as prescribed by regulations or by the carrier. Time to pay: Tickets are purchased in advance from ticket outlets. Consignees to whom the shipment was made may not defer the payment of the expenses and transportation charges of the goods they receive after the lapse of 24 hours following their delivery. *In case of delay in payment, the carrier may demand the judicial sale of the goods transported in an amount necessary to cover the cost of transportation and the expenses incurred. Article 374 of the Code of Commerce provides that: “The carrier who makes the delivery of the merchandise to the consignee by virtue of combined agreements or services with other carriers shall assume the obligations of those who preceded him in the conveyance, reserving his right to proceed against the latter if he was not the party directly responsible for the fault which gave rise to the claim of the shipper or consignee. The carrier who makes the delivery shall likewise acquire all the actions and rights of those who preceded him in the conveyance. The shipper and the consignee shall have an immediate right of action against the carrier who executed the transportation contract, or against the other carriers who may have received the goods transported without reservation. However, the reservation made by the latter shall not relieve them from the responsibilities which they may have incurred by their own acts.”

Article 375 of the Code of Commerce provides that: “The goods transported shall be especially bound to answer for the cost of transportation and for the expenses and fees incurred for them during their conveyance and until the moment of their delivery. This special right shall prescribe 8 days after the delivery has been made, and once prescribed, the carrier shall have no other action than that corresponding to him as an ordinary creditor.” C. Liability for demurrage Demurrage is the compensation provided for in the contract of affreightment for the detention of the vessel beyond the time agreed on for loading and unloading. It is a claim for damages for failure to accept delivery. *Liability for demurrage exists only when expressly stipulated in the contract. EXTRAORDINARY DILIGENCE: A. Underlying reason Reasons: 1. From the nature of the business and for reasons of public policy; 2. Relationship of trust; 3. Business is impressed with a special public duty; 4. Possession of the goods; 5. Preciousness of human life B. Effect of Stipulation Article 1744 of the New Civil Code states that: “A stipulation between the common carrier and the shipper or owner limiting the liability of the former for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence shall be valid, provided it be: (1) In writing, signed by the shipper or owner; (2) Supported by a valuable consideration other than the service rendered by the common carrier; and (3) Reasonable, just and not contrary to public policy.” Article 1757 of the New Civil Code states that: “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.”

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Article 1758 of the New Civil Code states that: “When a passenger is carried gratuitously, a stipulation limiting the common carrier's liability for negligence is valid, but not for wilful acts or gross negligence. The reduction of fare does not justify any limitation of the common carrier's liability.” Article 1760 of the New Civil Code states that: “The common carrier's responsibility prescribed in the preceding article cannot be eliminated or limited by stipulation, by the posting of notices, by statements on the tickets or otherwise.” C. Extraordinary diligence in carriage by sea 1. Seaworthiness of the vessel Sec. 3 [1] of the COGSA provides that: “The carrier shall be bound before and at the beginning of the voyage to exercise due diligence to — (a) Make the ship seaworthy; (b) Properly man,equip, and supply the ship; (c) Make the holds, refrigerating and cooling chambers, and all other parts of the ship in which goods are carried, fit and safe for their reception, carriage, and preservation.” Sec. 3 [2] of the COGSA provides that: “The carrier shall properly and carefully load, handle, stow, carry, keep, care for, and discharge the goods carried.” Sec. 116 of the IC Sec. 119 of the IC Article 609 of the Code of Commerce states that: “Captains, masters or patrons of vessels must be Filipinos, have legal capacity to contract in accordance with this code, and prove the skill, capacity, and qualifications necessary to command and direct the vessel, as established by marine or navigation laws, ordinances, or regulations, and must not be disqualified according to the same for the discharge of the duties of the position. If the owner of a vessel desires to be the captain thereof, without having the legal qualifications therefor, he shall

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limit himself to the financial administration of the vessel, and shall intrust the navigation to a person possessing the qualifications required by said ordinances and regulations.” *Extraordinary diligence requires that the ship which will transport the passengers and goods is seaworthy. *The carriers are deemed to warrant impliedly the seaworthiness of the ship. The failure of a common carrier to maintain in seaworthy condition the vessel involved in its contract of carriage is a clear breach of its duty prescribed in Article 1755 of the NCC. *Shippers of goods are not expected to inquire into the vessel’s seaworthiness and compliance with all maritime laws. *The unseaworthiness can be established by the fact that it did not withstand the natural and inevitable action of the sea. Overloading *Duty to exercise due diligence includes the duty to take passengers or cargoes that are within the carrying capacity of the vessel. Proper storage *The ship must not be only seaworthy but it must also be cargoworthy. The ship must be an efficient storehouse for her cargo. *The vessel must be adequately equipped and properly manned. Obligation of captain and crew *If the negligence of the captain and crew can be traced to the fact that they are really incompetent, the Limited Liability Rule cannot be invoked because the ship owner may be deemed negligent. Rule on deviation and transhipment Deviation *If route is stipulated upon by the shipper and carrier, carrier can’t change unless due to force majeure. *Carrier shall be liable for all losses suffered from any other cause, beside the sum stipulated for such case.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *If due to said force majeure he took another route and incurred expenses by reason thereof, he shall be reimbursed for such increase upon formal proof thereof (Art. 359, Code of Commerce). Transshipment is the act of taking cargo out of one ship and loading it in another. *When done without legal excuse, however competent and safe the vessel into which the transfer is made, is a violation of the contract and an infringement of the right of the shipper and subjects the carrier to liability if the freight is lost even by a cause otherwise excepted (Magellan Manufacturing Corp. v. CA). Article 359 of the Code of Commerce provides that: “If there is an agreement between the shipper and the carrier as to the road over which the conveyance is to be made, the carrier may not change the route, unless it be by reason of force majeure; and should he do so without this cause, he shall be liable for all the losses which the goods he transports may suffer from any other cause, beside paying the sum which may have been stipulated for such case. When on account of said cause of force majeure, the carrier had to take another route which produced an increase in transportation charges, he shall be reimbursed for such increase upon formal proof thereof.” D. Extraordinary diligence in carriage by land 1. Vehicle’s condition *Owners are required to make sure that the vehicles they are using are in good order and condition. 2. Traffic rules (RA 4136) *In cases involving breach of contract of carriage, proof of violation of traffic rules confirms that the carrier failed to exercise extraordinary diligence. 3. Obligation to Inspect *in overland transportation, common carrier is not bound nor empowered to make an examination of the contents of

packages or bags particularly those hand carried. Airline companies are required to inspect each and every cargo brought into the aircraft (RA 6235). E. Extraordinary diligence in carriage by air 1. Airworthiness - an aircraft, its engines, propellers and other components and accessories are of proper design and construction, and are safe for air navigation purposes, such design and construction being consistent with accepted engineering practice and in accordance with aerodynamic laws and aircraft science (RA 779). 2. Competent and well trained crew 3. To take the required and prescribed route 4. Adverse weather conditions or extreme climatic changes are some of the perils involved in air travel consequence of which the passenger must assume or expect. 5. RA 6235 (An Act Prohibiting Certain Acts Inimical to Civil Aviation and for Other Purposes) - acts punishable: a. to compel a change in the course or destination of an aircraft of Philippine registry; or b. to seize or usurp control of the aircraft while in flight. ACTIONS IN CASE OF BREACH OF CONTRACT OF CARRIAGE: A. Causes of action and nature/extent of liability (culpa contractual, culpa aquiliana and culpa delictual) Culpa contractual only the carrier is primarily liable and not the driver. Reason: There is no privity between the driver and the passenger. *The party to be impleaded is the carrier itself. Basis: Article 1759 of the New Civil Code Culpa delictual/criminal the driver is primarily liable. The carrier is subsidiarily liable only if the driver is convicted and declared insolvent. Basis: Article 100 of the Revised Penal Code Culpa aquiliana the carrier and the driver are solidarily liable as joint tortfeasor.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Basis: Article 2180 of the New Civil Code B. Prescriptive period and conditions precedent 1. Overland transportation of goods and coastwise shipping (Domestic) Article 366 of the Code of Commerce provides that: “Within the 24 hours following the receipt of the merchandise, the claim against the carrier for damage or average which may be found therein upon opening the packages, may be made, provided that the indications of the damage or average which gives rise to the claim cannot be ascertained from the outside part of such packages, in which case the claim shall be admitted only at the time of receipt. After the periods mentioned have elapsed, or the transportation charges have been paid, no claim shall be admitted against the carrier with regard to the condition in which the goods transported were delivered.” *Prior notice of claim does not apply to misdelivery of goods. Purpose of notice: To inform the carrier that the shipment has been damaged and that it is charged with liability therefor, and to give it an opportunity to make an investigation and fix responsibility while the matter is fresh. *The filing of notice of claim is a condition precedent for recovery in case of damage condition of the goods. *Not provided by Article 366 of the Code of Commerce. Thus, in such absence, the New Civil Code rules on prescription apply. Prescriptive period: General Rule: If written, 10 years, if not written, 6 years Exceptions: 1. COGSA – 1 year 2. Warsaw Convention – 2 years Example: Q: In case of pending extrajudicial claim, does it suspend the one year period? A: NO

*One year period applies to shipper, assignee, insurer, subrogees, and successor in interest. *One year period does not apply in cases of delay or misdelivery. International Carriage of Goods by Sea Sec. 3 [6] of the COGSA substantially provides that in case of patent damage, the shipper should file a claim with the carrier immediately upon delivery. In case of latent damage, the shipper should file a claim with the carrier within 3 days from delivery. Action for loss or damage to the cargo should be brought within one year after: delivery of the goods (delivered but damaged goods); or the date when the goods should have been delivered (loss). *The filing of a notice of claim is not a condition precedent. Recoverable Damages The court may award the following damages: 1. Actual/Compensatory Damages 2. Temperate Damages 3. Liquidated Damages 4. Exemplary Damages 5. Moral Damages 6. Nominal Damages Actual/Compensatory damages are those awarded to the aggrieved party as adequate compensation only for such pecuniary loss suffered by him as he has alleged and duly proved. Article 2199 of the Civil Code states that: “Except as provided by law or by stipulation, one is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly proved. Such compensation is referred to as actual or compensatory damages.” *To claim this award, proving the amount is necessary. *Procedures or plastic surgeries performed to restore the part of the body injured are included as a component of actual damages. Temperate damages or moderate damages these are damages the amount of which is left to the sound discretion of the court, but it is necessary that there be some injury or pecuniary loss established,

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro the exact amount of which, could not be determined by the plaintiff by reason of the nature of the case. Article 2224 of the New Civil Code provides that: “Temperate or moderate damages, which are more than nominal but less than compensatory damages, may be recovered when the court finds that some pecuniary loss has been suffered but its amount can not, from the nature of the case, be provided with certainty.” *The court is convinced that there is pecuniary loss. *There is no actual certainty of the actual amount loss. The court is allowed to calculate the amount. *This is in the form of actual damages Liquidated damages are fixed damages previously agreed by the parties to the contract and payable to the innocent party in case of breach by the other. Article 2226 of the New Civil Code provides that: “Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof.” *This is in the form of actual damages but a stipulated one. *Proving the amount is not necessary. *In this kind of damages, estoppel applies. General Rule: The court cannot change the amount. Exception: If the amount stipulated is excessive the court may disregard said amount and may compute the actual damages. *The only thing to be proved is the fact of loss. Exemplary damages are mere accessories to other forms of damages except nominal damages. They are mere additions to actual, moral, temperate and liquidated damages which may or may not be granted at all depending upon the necessity of setting an example for the public good as a form of deterrent to the repetition of the same act by any one. Article 2229 of the New Civil Code provides that: “Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages.” *Awarded because of the wanton, fraudulent, malevolent, oppressive acts of the carrier.

*This is awarded to prevent other carrier to commit oppressive acts. *This cannot be awarded unless the plaintiff is entitled to moral at the same time actual or temperate damages. Article 2231 of the New Civil Code states that: “In quasi-delicts, exemplary damages may be granted if the defendant acted with gross negligence.” Article 2232 of the New Civil Code states that: “In contracts and quasicontracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.” Article 2233 of the New Civil Code states that: “Exemplary damages cannot be recovered as a matter of right; the court will decide whether or not they should be adjudicated.” Article 2234 of the New Civil Code states that: “While the amount of the exemplary damages need not be proved, the plaintiff must show that he is entitled to moral, temperate or compensatory damages before the court may consider the question of whether or not exemplary damages should be awarded In case liquidated damages have been agreed upon, although no proof of loss is necessary in order that such liquidated damages may be recovered, nevertheless, before the court may consider the question of granting exemplary in addition to the liquidated damages, the plaintiff must show that he would be entitled to moral, temperate or compensatory damages were it not for the stipulation for liquidated damages.” Article 2235 of the New Civil Code states that: “A stipulation whereby exemplary damages are renounced in advance shall be null and void.” Nominal damages are not for indemnification of loss but for vindication of a right violated. Article 2221 of the New Civil Code provides that: “Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him.” Article 2222 of the New Civil Code states that: “The court may award nominal damages in every obligation arising from any source enumerated in Article 1157, or

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro in every case where any property right has been invaded.” Article 2223 of the New Civil Code states that: “The adjudication of nominal damages shall preclude further contest upon the right involved and all accessory questions, as between the parties to the suit, or their respective heirs and assigns.” *In Japan Airlines v CA, JAL failed to give the plaintiff the priority for the first available flight. The SC awarded nominal damages. Moral damages are in the category of an award designed to compensate the claimant for actual injury suffered and not to impose a penalty on the wrongdoer. Article 2217 of the New Civil Code provides that: “Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful act for omission.” Q: When moral damages may be awarded? A: 1. Death of a passenger; 2. Carrier is guilty of fraud, malice, bad faith even if there is no death of a passenger (Case: Lopez v Pan-American); 3. In Air France case MARITIME LAW: Source: Code of Commerce A. Concept of Maritime Law Maritime Law is the system of laws which particularly relates to the affairs and business of the sea, to ships, their crews and navigation, and to maritime conveyance of persons and property. *Apply only to maritime trade and sea voyages. B. Limited Liability Rule 1. Concept The exclusively real and hypothecary nature of maritime law operates to limit the liability of the shipowner to the value of the vessel, earned freightage and proceeds of the insurance, if any. “NO VESSEL NO LIABILITY” expresses in a nutshell the limited liability rule. The total destruction of the vessel extinguishes

maritime lien as there is no longer any res to which it can attach. Q: Is this rule applies in the handling of the passengers? A: YES Q: Whose liability is this? A: Shipowner or Agents. Article 586 2nd paragraph states that: “By ship agent is understood the person entrusted with provisioning or representing the vessel in the port in which it may be found.” *Ship agent is the only person that can be sued directly. Reason: Article 618 of the Code of Commerce provides so. Article 618 1st paragraph states that: “The ship captain shall be civilly liable to the ship agent, and the latter to the third persons who may have made contracts with the former; x x x.” Q: What kind? A: Maritime in nature; marine transactions connected with maritime law; maritime trade and commerce Purpose: To encourage shipbuilding and maritime transactions Article 587 of the Code of Commerce provides that: “The ship agent shall also be civilly liable for the indemnities in favor of third persons which may arise from the conduct of the captain in the care of the goods which he loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel with all her equipments and the freight it may have earned during the voyage.” Article 590 of the Code of Commerce provides that: “The coowners of a vessel shall be civilly liable in the proportion of their interests in the common fund, for the results of the acts of the captain, referred to in Article 587. Each co-owner may exempt himself from this liability by the abandonment, before a notary, of the part of the vessel belonging to him.” Article 837 of the Code of Commerce provides that: “The civil liability incurred by the shipowners in the case prescribed in this section, shall be understood as limited to the value of the vessel with all its appurtenances and freightage earned during the voyage.”

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro When applicable: The Code of Commerce sanctions the application of the doctrine in the following cases: 1. Civil liability for indemnities in favor of third persons which arise from the conduct of the captain in the case of the goods which the vessel carried; 2. Civil liability arising from collisions; 3. Unpaid wages of the captain and the crew if the vessel and its cargo are totally lost by reason of capture of shipwreck. 2. Exceptions to the rule Exceptions: 1. When the injury to or death of a passenger is due either to the fault of the shipowner, or to the concurring negligence of the shipowner and the captain; 2. When the vessel is insured to the extent of the insurance proceeds; and *Freightage collectible Q: How come insurance is an exception? A: Because there is no loss. The loss was compensated by the insurance company 3. In Workmen’s Compensation claims Q: Why is an exception? A: Because not maritime in nature *In Yangco v Laserna case, the SC held that it covers anything that is connected with maritime transactions 3. Abandonment Q: If there’s partial loss can the shipowner/agent be exempted from liability? A: YES. If there is abandonment. Q: If there is total loss, is it necessary to abandon? A: NO. There is nothing to abandon. Case: Luzon Stevedoring Article 587 of the Code of Commerce states that: “The ship agent shall also be civilly liable for the indemnities in favor of third persons which may arise from the conduct of the captain in the care of the goods which he loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel with all her equipments and the freight it may have earned during the voyage.” Q: How claims are satisfied under the Limited Liability Rule? A: All claims should be collated before they can be satisfied from what

remains of the insurance proceeds and freightage at the time of the loss. No claimant should be given preference over the others by the simple expedience of having filed or completed its action earlier than the rest. Thus, the execution of judgment in earlier completed cases, even those already final and executory, must be stayed pending completion of all cases occasioned by the subject sinking. Then and only then can all such claims be simultaneously settled, either completely or pro-rata should the insurance proceeds and freightage be not enough to satisfy the claim. Case: Aboitiz Shipping Co. v General Accident Fire and Life Insurance Corporation C. Vessels - Those engaged in navigation, whether coastwise or on the high seas, including floating docks, pontoons, dredges, scows and any other floating apparatus destined for the services of the industry or maritime commerce. Excluded are local and foreign military vessels, bancas and other watercrafts of less than 3 tons gross capacity and small watercrafts engaged in river and bay traffic. 1. Acquisition a. By prescription Article 573 of the Code of Commerce states that: “Merchant vessels constitute property which may be acquired and transferred by any of the means recognized by law. The acquisition of a vessel must appear in a written instrument, which shall not produce any effect with respect to third persons if not inscribed in the registry of vessels. The ownership of a vessel shall likewise be acquired by possession in good faith, continued for three years, with a just title duly recorded. In the absence of any of these requisites, continuous possession for ten years shall be necessary in order to acquire ownership. A captain may not acquire by prescription the vessel of which he is in command.”

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Requisites: 1. Acquisition must appear in a written instrument 2. Such shall not produce any effect to third persons if not inscribed in the registry of vessels 3. Shall be acquired by possession in good faith, continued for 3 years 4. With a just title duly recorded 5. In the absence of any of there, continuous possession for 10 years shall be necessary to acquire ownership Q: Can the ship captain acquire vessel by prescription? A: NO. The character of possession he has is not those for acquisitive possession. The requisite for acquisitive possession is that possession as an owner. Article 575 of the Code of Commerce states that: “Coowners of vessels shall have the right of repurchase and redemption in sales made to strangers, but they may exercise the same only within the 9 days following the inscription of the sale in the registry, and by depositing the price at the same time.” b. By sale Article 576 of the Code of Commerce states that: “In the sale of a vessel it shall always be understood as included the rigging, masts, stores and engine of a steamer appurtenant thereto, which at the time belongs to the vendor. The arms, munitions of war, provisions and fuel shall not be considered as included in the sale. The vendor shall be under the obligation to deliver to the purchaser a certified copy of the record sheet of the vessel in the registry up to the date of sale.” Article 577 of the Code of Commerce states that: “If the alienation of the vessel should be made while it is on voyage, the freightage which it earns from the time it receives its last cargo shall pertain entirely to the purchaser, and the payment of the crew and other persons who make up its

complement for the same voyage shall be for his account. If the sale is made after the vessel has arrived at the port of its destination, the freightage shall pertain to the vendor, and the payment of the crew and other individuals who make up its complement shall be for his account, unless the contrary is stipulated in either case. *If made while it is on voyage, the freightage which it earns from the time it receives its last cargo shall pertain entirely to the purchaser, and the payment of the crew and other persons who make up its complement shall be for his account. *If made after vessel arrived at port of its destination, freightage shall pertain to the vendor, and the payment of the crew and other individuals who make up its complement shall be for his account, unless the contrary is stipulated in either case. Article 578 of the Code of Commerce states that: “If the vessel being on a voyage or in a foreign port, its owner or owners should voluntarily alienate it, either to Filipinos or to foreigners domiciled in the capital or in a port of another country, the bill of sale shall be executed before the consul of the Republic of the Philippines at the port where it terminates its voyage and said instrument shall produce no effect with respect to third persons if it is not inscribed in the registry of the consulate. The consul shall immediately forward a true copy of the instrument of purchase and sale of the vessel to the registry of vessels of the port where said vessel is inscribed and registered. In every case the alienation of the vessel must be made to appear with a statement of whether the vendor receives its price in whole or in part, or whether he preserves in whole or in part any claim on said vessel. In case the sale is made to a Filipino, this fact shall be stated in the certificate of navigation. When a vessel, being in a voyage, shall be

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro rendered useless for navigation, the captain shall apply to the competent judge or court of the port of arrival, should it be in the Philippines; and should it be in a foreign country, to the consul of the Republic of the Philippines, should there be one, or, where there is none, to the judge or court or to the local authority; and the consul, or the judge or court, shall order an examination of the vessel to be made. If the consignee or the insurer should reside at said port, or should have representatives there, they must be cited in order that they may take part in the proceedings on behalf of whoever may be concerned.” c. Registration Section 810 of the Tariff and Customs Code provides that: “The Bureau of Customs is vested with exclusive authority over the registration and documentation of Philippine vessels. By it shall be kept and preserved the records of registration and of transfers and encumbrances of vessels; and by it shall be issued all certificates, licenses or other documents incident to registration and documentation, or otherwise requisite for Philippine vessels.” *Through the MARINA d. Ship’s manifest Sec. 906 of the Tariff and Customs Code provides that: “Manifests shall be required for cargo and passengers transported from one place or port in the Philippines to another only when one or both of such places is a port of entry.” *Declaration of the entire cargo. The object is to furnish customs officers with a list to check against, to inform the revenue officers what goods are brought into a port of the country on a vessel. Hence, the requirement that a vessel must carry a manifest is not complied with even if a bill of lading can be presented. *A bill of lading is just a declaration of a specific cargo rather than the entire cargo. It is issued as a

matter of convenience by virtue of a contract. D. Persons who take part in Maritime Commerce 1. Shipowners and shipagents Article 586 of the Code of Commerce provides that: “The shipowner and the ship agent shall be civilly liable for the acts of the captain and for the obligations contracted by the latter to repair, equip, and provision the vessel, provided the creditor proves that the amount claimed was invested for the benefit of the same. By ship agent is understood the person entrusted with provisioning or representing the vessel in the port in which it may be found.” Article 587 of the Code of Commerce provides that: “The ship agent shall also be civilly liable for the indemnities in favor of third persons which may arise from the conduct of the captain in the care of the goods which he loaded on the vessel; but he may exempt himself thereform by abandoning the vessel with all her equipments and the freight it may have earned during the voyage.” Article 588 of the Code of Commerce provides that: “Neither the shipowner nor the ship agent shall be liable for the obligations contracted by the captain, if the latter exceeds the powers and privileges pertaining to him by reason of his position or conferred upon him by the former. Nevertheless, if the amounts claimed were invested for the benefit of the vessel, the responsibility therefor shall devolve upon its owner or agent.” a. Rules in case of part-owners Article 589 of the Code of Commerce provides that: “If two or more persons should be part owners of a merchant vessel, a partnership shall be presumes as estrablished by the co-owners. This partnership shall be governed by the resolution of the majority of the members. If the part-owners should not be more than two, the disagreement of views, if any, shall be decided by the vote of the member having the largest interest. If the interests are equal,

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro it should be decided by lot. The person having the smallest share in the ownership shall have one vote; and proportionately the other part owners as many votes as they have parts equal to the smallest one. A vessel may not be detained, attached or levied upon in execution in its entirety, for the private debts of a part owner, but the proceedings shall be limited to the interest which the debtor may have in the vessel, without interfering with the navigation.” Article 590 of the Code of Commerce provides that: “The coowners of a vessel shall be civilly liable in the proportion of their interests in the common fund, for the results of the acts of the captain, referred to in Article 587.” Article 591 of the Code of Commerce provides that: “All the part owners shall be liable, in proportion to their respective ownership, for the expenses for repairing the vessel, and for other expenses which are incurred by virtue of a resolution of the majority. They shall likewise be liable in the same proportion for the expenses for the maintenance, equipment, and provisioning of the vessel, necessary for navigation.” Article 592 of the Code of Commerce provides that: “The resolution of the majority with regard to the repair, equipment, and provisioning of the vessel in the port of departure shall bind the minority, unless the minority members renounce their interests, which must be acquired by the other co-owners, after a judicial appraisement of the value of the portion or portions assigned. The resolutions of the majority relating to the dissolution of the partnership and sale of the vessel shall also be binding on the minority. The sale of the vessel must be made at public auction, subject to the provisions of the law of civil procedure, unless the coowners unanimously agree otherwise, saving always the right

of repurchase and redemption provided for in Article 575.” Article 593 of the Code of Commerce provides that: “The owners of a vessel shall have preference in her charter over other persons, under the same conditions and price. If two or more of them should claim this right, the one having the greater interest shall be preferred; and should they have equal interests, the matter shall be decided by lot.” Article 594 of the Code of Commerce states that: “The coowners shall elect the manager who is to represent them in the capacity of ship agent. The appointment of director or ship agent shall be revocable at the will of the members.” b. Rules in case of shipagents Article 595 of the Code of Commerce states that: “The ship agent, whether he is at the same time the owner of the vessel, or a manager for an owner or for an association of co-owners, must have the capacity to trade and must be recorded in the merchant’s registry of the province. The ship agent shall represent the ownership of the vessel, and may, in his own name and in such capacity, take judicial and extrajudicial steps in matters relating to commerce.” Article 596 of the Code of Commerce provides that: “The ship agent may discharge the duties of captain of the vessel, subject in every case to the provision of Article 609. If two or more co-owners apply for the position of captain, the disagreement shall be decided by a vote of the members; and if the vote should result in a tie, it shall be decided in favor of the co-owner having the larger interest in the vessel. If the interests of the applicants should be equal, and there should be a tie, the matter shall be decided by lot.” Article 597 of the Code of Commerce states that: “The ship agent shall designate and come to

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro terms with the captain, and shall contract in the name of the owners, who shall be bound in all that refer to repairs, details equipment, armament, provisions of food and fuel, and freight of the vessel, and, in general, in all that relate to the requirements of navigation.” Article 598 of the Code of Commerce states that: “The ship agent may not order a new voyage, or make contracts for a new charter, or insure the vessel, without the authorization of its owner or resolution of the majority of the co-owners, unless these powers were granted him in the certificate of his appointment. If he insures the vessel without authorization therefore, he is subsidiarily liable for the solvency of the insurer.” Article 599 of the Code of Commerce states that: “The ship agent managing for an association shall render to his associates an account of the results of each voyage of the vessel, without prejudice to always having the books and correspondence relating to the vessel and to its voyages at their disposal.” Article 600 of the Code of Commerce states that: “After the account of the managing agent has been approved by a relative majority, the co-owners shall pay the expenses in proportion to their interest, without prejudice to the civil or criminal actions which the minority may deem fit to institute afterwards. In order to enforce the payment, the managing agent shall be entitled to an executor action (‘accion ejecutiva’), which shall be instituted by virtue of a resolution of the majority, and without further proceedings than the acknowledgment of the signatures of the persons who voted for the resolution.” Article 601 of the Code of Commerce states that: “Should there be any profits, the co-owners may demand of the managing agent the amount corresponding to their interests by means of an

executor action (‘accion ejecutiva’), without any other requisite than the acknowledgment of the signatures on the instrument approving the account.” Article 602 of the Code of Commerce states that: “The ship agent shall indemnify the captain for all the expenses he may have incurred with funds of his own or of others, for the benefit of the vessel.” *The ship agent is entrusted with the provisioning and representing the vessel in the port in which it may be found. His liability to passengers and cargo owners for loss or injury is the same as the shipowner. *He is solidarily liable with the owner for such loss or damage subject to his right to claim reimbursement from the shipowner. *Only agent that can be sued directly. 2. Captains and masters of vessels a. Qualifications Article 609 of the Code of Commerce states that: “Captains, masters or patrons of vessels must be Filipinos, have legal capacity to contract in accordance with this code, and prove the skill, capacity, and qualifications necessary to command and direct the vessel, as established by marine or navigation laws, ordinances, or regulations, and must not be disqualified according to the same for the discharge of the duties of the position. If the owner of a vessel desired to be the captain thereof, without having the legal qualifications therefor, he shall limit himself to the financial administration of the vessel, and shall intrust the navigation to a person possessing the qualifications required by said ordinances and regulations.” b. Powers and functions Article 610 of the Code of Commerce states that: “The following powers shall be inherent in the position of captain, master or patron of a vessel: 1. To appoint or make contracts with the crew in the absence of the ship agent, and

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro to propose said crew, should said agent be present; but the ship agent may not employ any member against the captain’s express refusal; 2. To command the crew and direct the vessel to the port of its destination, in accordance with the instructions he may have received from the ship agent; 3. To impose, in accordance with the contracts and with the laws and regulations of the merchant marine, and when on board the vessel, correctional punishment upon those who fail to comply with his orders or are wanting in discipline, holding a preliminary hearing on the crimes committed on board the vessel on the seas, which crimes shall be turned over to the authorities having jurisdiction over the same at the first port touched; 4. To make contracts for the charter of the vessel in the absence of the ship agent or of its consignee, acting in accordance with the instructions received and protecting the interests of the owner with utmost care; 5. To adopt all proper measures to keep the vessel well supplied and equipped, purchasing all that may be necessary for the purpose, provided there is no time to request instruction from the ship agent; and 6. To order, in similar urgent cases while on a voyage, the repairs on the hull and engines of the vessel and in its rigging and equipment, which are absolutely necessary to enable it to continue and finish its voyage; but if he should arrive at a point where there is a consignee of the vessel, he shall act in concurrence with the latter.” Article 611 of the Code of Commerce states that: “In order to comply with the obligations mentioned in the preceding article, the captain, when he has no funds and does not expect to receive any from the ship agent, shall obtain the same in the successive order stated below: 1. By requesting said funds from the consignee of the

vessel or correspondents of the ship agent; 2. By applying to the consignees of the cargo or to those interested therein; 3. By drawing on the ship agent; 4. By borrowing the amount required by means of a loan on bottomry; and 5. By selling a sufficient amount of the cargo to cover the sum absolutely indispensable for the repair of the vessel and to enable it to continue its voyage. In these two last cases he must apply to the judicial authority of the port, if in the Philippines, and to the consul of the Republic of the Philippines if in a foreign country, and where there is none, to the local authority, proceeding in accordance with the provisions of Article 583, and with the provisions of the law of civil procedure.” Article 612 of the Code of Commerce states that: “The following obligations shall be inherent in the office of the captain: 1. To have on board before starting on a voyage a detailed inventory of the hull, engines, rigging, sparemasts, tackle, and other equipment of the vessel; the royal or the navigation certificate; the roll of the persons who make up the crew of the vessel, and the contracts entered into with them; the lists of passengers; the bill of health; the certificate of the registry proving the ownership of the vessel and all the obligations which encumber the same up to that date; the charter parties or authenticated copies thereof; the invoices or manifests of the cargo, and the memorandum of the visit or inspection by experts, should it have been made at the port of departure; 2. To have a copy of this code on board; 3. To have thee folioed and stamped books, placing at the beginning of each one a memorandum of the number of folios it contains, signed by the maritime authority, and in his absence by the competent authority. In the first book, which

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro shall be called “log book,” he shall enter day by day the condition of the atmosphere, the prevailing winds, the courses taken, the rigging carried, the power of the engines used in navigation, the distances covered, the maneuvers executed, and other incidents of navigation; he shall also enter the damage suffered by the vessel in her hull, engines, rigging, and tackle, no matter what its cause may be, as well as the impairment and damage suffered by cargo, and the effect and importance of the jettison, should there be any; and in cases of serious decisions which require the advice or a meeting of the officers of the vessel, or even of the crew and passengers, he shall record the decisions adopted. For the information indicated he shall make use of the binnacle book and of the steam of engine book kept by the engineer. In the second book called the “accounting book,” he shall record all the amounts collected and paid for the account of the vessel, entering specifically the article by article, the source of the collection and the amounts spent for provisions, repairs, acquisitions of equipment or goods, fuel, food, outfits, wages, and other expenses of whatever nature they may be. He shall furthermore enter therein a list of all the members of the crew, stating their domiciles, their wages and salaries, and the amounts they may have received on account, directly or by delivery to their families. In the third book, called “freight book,” he shall record the loading and discharge of all the gods, stating their marks and packages, names of the shippers and of the consignees, ports of loading and unloading, and the freightage they give. In this same book he shall record the names and places of sailing of the passengers, the number of packages in their baggage, and the price of passage; 4. Before receiving cargo, to make with the officers of the crew and two experts, if required by the

shippers and passengers, an examination of the vessel, in order to ascertain whether it is watertight, with the rigging and engines in good condition, and with the equipment required for good navigation, preserving under his responsibility a certificate of the memorandum of his inspection, signed by all those who may have taken part therein. The experts shall be appointed, one by the captain of the vessel and another by those who request its examination, and in case of disagreement a third shall be appointed by the marine authority of the port or by the authority exercising his functions; 5. To remain constantly on board the vessel with the crew while the cargo is being taken on board and to carefully watch the stowage thereof; not to consent to the loading of any merchandise or matter of a dangerous character, such as inflammable or explosive substances, without the precautions which are recommended for their packing, handling and isolation; not to permit the carriage on deck of any cargo which by reason of its arrangement, volume, or weight makes the work of the sailors difficult, and which might endanger the safety of the vessel; and if, on account of the nature of the merchandise, the special character of the shipment, and principally the favorable season in which it is undertaken, merchandise may be carried on deck, he must hear the opinion of the officers of the vessel and have the consent of the shippers and of the ship agent; 6. To demand a pilot at the expense of the vessel whenever required by the navigation, and principally when he has to enter a port, canal, or river, or has to take a roadstead or anchoring place with which neither he nor the officers and crew are acquainted; 7. To be on deck on reaching land and to take command on entering and leaving ports, canals,

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro roadsteads, and rivers, unless there is a pilot on board discharging his duties. He shall not spend the night away from the vessel except for serious causes or by reason of official business; 8. To present himself, when making a port in distress, to the maritime authority if in the Philippines and to the consul of the Republic of the Philippines if in a foreign country, before 24 hours have elapsed, and to make a statement of the name registry, and port of departure of the vessel, of its cargo, and the cause of arrival which declaration shall be visaed by the authority or the consul, if after examining the same it is found to be acceptable, giving the captain the proper certificate proving his arrival in distress and the reasons therefor. In the absence of the maritime authority or of the consul, the declaration must be made before the local authority; 9. To take the necessary steps before the competent authority in order to record in the certificate of the vessel in the registry of vessels the obligations which he may contract in accordance with Article 583; 10. To place under good care and custody all the papers and belongings of any members of the crew who might die on the vessel, drawing up a detailed inventory, in the presence of passengers, or, in their absence, of members of the crew as witnesses; 11. To conduct himself according to the rules and precepts contained in the instructions of the ship agent, being liable for all that which he may do in violation thereof; 12. To inform the ship agent from the port at which the vessel arrives, of the reason of his arrival, taking advantage of the semaphore, telegraph, mail, etc., as the case may be; to notify him of the cargo he may have received, stating the names and domiciles of the shippers, freightage earned, and amounts borrowed on bottomry loan; to advise him of his

departure, and of any operation and date which may be of interest to him; 13. To observe the rules with respect to situation, lights and maneuvers in order to avoid collisions; 14. To remain on board, in case the vessel is in danger, until all hope to save it is lost, and before abandoning it, to hear the officers of the crew, abiding by the decision of the majority; and if the boats are to be taken to, he shall take with him, before anything else, the books and papers, and then the articles of most value, being obliged to prove, in case of the loss of the books and papers, that he did all he could to save them; 15. In case of wreck, to make the proper protest in due form at the first port of arrival, before the competent authority or the Philippine consul, within 24 hours, specifying therein all the incidents of the wreck, in accordance with subdivision 8 of this article; 16. To comply with the obligations imposed by the laws and regulations on navigation, customs, health, and others.” c. Discretion powers *A ship’s captain must be accorded a reasonable measure of discretionary authority to decide what the safety of the ship and of its crew and cargo specifically requires on a stipulated ocean voyage. Case:Inter-Orient Maritime Enterprises Inc. v CA 3. Pilot a. Concept Pilot is a person duly qualified and licensed to conduct a vessel into or out of ports or in certain waters. *Generally connotes a person taken on board at a particular place for the purpose of conducting a ship through a river, road or channel or from a port. *If he is in command, he becomes the Master pro hac vice. *While exercising his functions a pilot is in sole command of the ship and supersedes the master for the time being in the command and

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro navigation of the ship; the master does not surrender his vessel to the pilot and the pilot is not the master. There are occasions when the master may and should interfere and even displace the pilot, as when the pilot is obviously incompetent or intoxicated. Case: Far Eastern Shipping v CA b. Relationship to master and shipowner 4. Officers and crew of the vessel i. Sailing mate/First mate ii. Second mate iii. Engineers – marine engineers iv. Crew – cabin boy; paramedics; watchkeeper; radio officers 5. Supercargoes person who discharges 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. E. Charter parties 1. Concept Article 655 of the Code of Commerce states that: “Charter parties executed by the captain in the absence of the ship agent shall be valid and effective, even though in executing them he should have acted in violation of the orders and instructions of the ship agent or shipowner; but the latter shall have a right of action against the captain for indemnification of damages.” Charter party is a lease contract by which with the entire ship or some principal part thereof is let by the owner to another person for a specified period of time or use. 2. Kinds; bareboat and contract of affreightment Kinds: 1. Bareboat or demise means the whole vessel is lend to the charterer which transfers to him its entire command and possession and consequent control over its navigation, including the master and crew who are his servants. The charterer is treated as owner pro hac vice of the vessel. In such case, a common carrier becomes a private carrier. *Charterer means the vessel assumes all responsibilities of

navigation and provides his own people. *Shipowner is not liable to third person; it is the charterer who is liable to them. General Rule: The charterer is liable to the third person. Exception: Shipowner may still be held liable if the injury was caused by unseaworthiness or negligence of the shipowner beyond before the demise or bareboat took over. 2. Contract of affreightment involves that use of shipping space leased by the owner in part or as a whole, to carry goods for others. *The shipowner retains the possession, command and navigation of the ship, the charterer merely having use of the space in the vessel in return for his payment of the charter hired. *The shipowner is liable to third person. 3. Persons qualified to make charter Q: Can the captain enter into a charter contract? A: YES provided that he is authorized. Q: Can the charterer enter into a subcharter contract? A: YES provided it is not prohibited. This is just like the rule in lease. 4. Requisites of a valid charter Article 652 of the Code of Commerce states that: “A charter party must be drawn in duplicate and signed by the contracting parties, and when either does not know how or is not able to do so, by two witnesses at his request. The charter party shall contain, besides the conditions freely stipulated, the following circumstances: 1. The kind, name, and tonnage of the vessel; 2. Its flag and port of registry; 3. The name, surname, and domicile of the captain; 4. The name, surname, and domicile of the ship agent, if the latter should make the charter party; 5. The name, surname, and domicile of the charterer; and if he states that he is acting by commission, that of the person for whose account he makes the contract; 6. The port of loading and unloading; 7. The capacity, number of tons or the weight or measurement which they respectively bind themselves to load and to transport, or

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro whether the charter party is total; 8. The freightage to be paid, stating whether it is to be a fixed amount for the voyage or so much per month, or for the space to be occupied, or for the weight or measure of the goods of which the cargo consists, or in any other manner whatsoever agreed upon; 9. The amount of primage to be paid to the captain; 10. The days agreed upon for loading and unloading; 11. The lay days and extra lay days to be allowed and the demurrage to be paid for each of them.” Requisites: 1. Consent of the contracting parties 2. Existing vessel which should be placed at the disposition of the shipper 3. Freight 4. Compliance with Article 652 of the Code of Commerce 5. Concept of and liability for demurrage Demurrage is the sum due, by express contract, for the detention of the vessel, in loading and unloading, beyond the time allowed in the contract of affreightment, and to any other improper detention or delay beyond the time set for loading. 6. Rights and obligations of charter parties Shipowner or Charterer Ship agent If the vessel is To pay the agreed chartered wholly, charter price not to accept cargo from others To observe To pay freightage represented on unboarded capacity cargo To unload cargo To pay losses to clandestinely others for loading placed uncontracted cargo or illicit cargo To substitute To wait if the another vessel if vessel needs load is less than repair 3/5 of capacity To leave the port To pay expenses if the charterer for deviation does not bring the cargo within the lay days and extra lay days allowed To place in a vessel in a

condition to navigate; to bring cargo to nearest neutral port in case of war or blockade F. Loans on Bottomry and Respondentia 1. Definition Article 719 of the Code of Commerce states that: “A loan in which under any condition whatever, the repayment of the sum loaned and of the premium stipulated depends upon the safe arrival in port of the goods on which it is made, or of the price they may receive in case of accident, shall be considered a loan on bottomry or respondentia.” Bottomry is a loan secured by the shipowner or ship agent guaranteed by the vessel itself and payable only upon arrival of vessel at destination. *Captain may enter into bottomry loan provided there is justification, example of which is, for immediate repairs. Respondentia is a loan secured by the owner of the cargo payable upon safe arrival of cargo at destination. Barratry is an act of the captain or crew for fraudulent purposes. 2. Distinguished from ordinary loan Ordinary Loan With or without collateral Any property may be used as collateral Absolutely payable Obligation to pay still exists in the event the collateral was lost First lender is the first priority Need not be in writing to be enforceable

Bottomry/Respond entia Always with collateral Property is limited to vessel/cargo Conditionally payable Loan is extinguished in the event that the vessel/cargo was lost Last lender is the first priority Need to be in writing to be enforceable

3. Parties to the loan Parties: 1. Ship owner or ship agent 2. Owner of the cargo 3. Lender 4. Formalities needed

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Article 720 of the Code of Commerce states that: “Loans on bottomry or respondentia may be executed: 1. By means of a public instrument; 2. By means of a policy signed by the contracting parties and the broker taking part therein; 3. By means of a private instrument. Under whichever of these forms the contract is executed, it shall be entered in the certificate of the registry of the vessel and shall be recorded in the registry of vessels, without which requisites the credits of this kind shall not have, with regard to other credits, the preference which, according to their nature, they should have, although the obligation shall be valid between the contracting parties.” Formal Requirements: a. By means of public instrument; b. Policy signed by the contracting parties and the broker taking part therein; and c. by means of private instrument. Reason: Must be in writing to be enforceable. 5. Effect of loss of on loan Article 731 of the Code of Commerce states that: “The actions pertaining to the lender shall be extinguished by the absolute loss of the goods on which the loan was made, if it arose from an accident of the sea at the time and during the voyage designated in the contract, and it is proven that the cargo was on board; but this shall not take place if the loss was caused by the inherent defect of the thing, or through the fault or malice, of the borrower, or barratry on the part of the captain, or if it was caused by damages suffered by the vessel as a consequence of being engaged in contraband, or if it arose from having loaded the merchandise on a vessel different from that designated in the contract, unless this change should have been made by reason of force majeure. Proof of the loss as well as of the existence of the vessel of the goods declared to the lender as the object of the loan is incumbent upon him who received the loan.” General Rule: If the property that was collateral was loss, the loan is extinguished.

Exceptions: 1. Perished due to inherent defects; 2. Brought about by malicious conduct of the shipowner; 3. Barratry of the captain; 4. Engaged in unlawful transaction; and 5. The cargo loaded on the vessel be different in from that agreed upon. *Commonality of all the exceptions is that the borrower is at fault. 6. Cases where loan is regarded as simple loan a. The loan must be made in connection with the maritime transaction otherwise the loan becomes a simple loan. b. If the loan is bigger than the value of the collateral, the loan becomes a simple loan. c. If the property is not exposed to maritime peril. Reason: To prevent abuse by the borrower of the benefits of this loan. Article 726 of the Code of Commerce states that: “If the lender should prove that he loaned as amount larger than the value of the object liable for the bottomry loan, on account of fraudulent measures employed by the borrower, the loan shall be valid only for the amount at which said object is appraised by experts. The surplus principal shall be returned with legal interests for the entire time required for repayment.” Article 727 of the Code of Commerce states that: “If the full amount of the loan contracted in order to load the vessel should not be used for the cargo, the balance shall be returned before clearing. The same procedure shall be observed with regard to the goods taken as loan, if they were not loaded.” Article 728 of the Code of Commerce states that: “The loan which the captain takes at the point of residence of the owners of the vessel shall only affect that part thereof which belongs to the captain, if the other owners or their agents should not have given their express authorization therefor or should not have taken part in the transaction. If one or more of the owners should be requested to furnish the amount necessary to repair or provision the vessel, and they should not do so

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro within 24 hours, the interest which the parties in default may have in the vessel shall be liable for the loan in the proper proportion. Outside of the residence of the owners the captain may contract loans in accordance with the provisions of Articles 583 and 611.” Article 729 of the Code of Commerce provides that: “Should the goods on which money is taken not be subjected to risk, the contract shall be considered a simple loan, with the obligation on the part of the borrower to return the principal and interest at the legal rate, if that agreed upon should not be lower.” G. Averages 1. Concept Article 806 of the Code of Commerce provides that: “For the purposes of this code the following shall be considered averages: 1. All extraordinary or accidental expenses which may be incurred during the voyage in order to preserve the vessel, the cargo, or both; 2. Any damages or deteriorations which the vessel may suffer from the time it puts to sea from the port of departure until it casts anchor in the port of destination, and those suffered by the merchandise from the time they are loaded in the port of shipment until they are unloaded in the port of their consignment.” 2. Classes of average and the persons liable a. Simple average Article 809 of the Code of Commerce provides that: “As a general rule, simple or particular averages shall include all the expenses and damages caused to the vessel or to her cargo which have not inured to the common benefit and profit of all the persons interested in the vessel and her cargo, and especially the following: 1. The losses suffered by the cargo from the time of its embarkation until it is unloaded, either on account of inherent defect of the goods or by reason of an accident of the sea or force majeure, and the

expenses incurred to avoid and repair the same; 2. The losses and expenses suffered by the vessel in its hull, rigging, arms, and equipment, for the same causes and reasons, from the time it puts to sea from the port of departure until it anchors and lands in the port of destination; 3. The losses suffered by the merchandise loaded on deck, except in coastwise navigation, if the marine ordinances allow it; 4. The wages and victuals of the crew when the vessel is detained or embargoed by legitimate order or force majeure, if the charter has been contracted for a fixed sum for the voyage; 5. The necessary expenses on arrival at a port, in order to make repairs or secure provisions; 6. The lowest value of the goods sold by the captain in arrivals under stress for the payment of provisions and in order to save the crew, or to meet any other need of the vessel, against which the proper amount shall be charged; 7. The victuals and wages of the crew while the vessel is in quarantine; 8. The loss inflicted upon the vessel or cargo by reason of an impact or collision with another, if it is accidental and unavoidable. If the accident should occur through the fault or negligence of the captain, the latter shall be liable for all the losses caused; 9. Any loss suffered by the cargo through the fault, negligence, or barratry of the captain or of the crew, without prejudice to the right of the owner to recover the corresponding indemnity from the captain, the vessel, and the freightage.” General Rule: No reimbursement Principle: Loss will lie where it falls

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Reason: There was no common benefit Exception: if there is insurance Exception to the Exception: Stipulated in the insurance policy stating no liability on the part of the insurer regarding particular average. Article 810 of the Code of Commerce provides that: “The owner of the goods which gave rise to the expense or suffered the damage shall bear the simple or particular averages.” Q: Who is liable? A: Owner of the goods b. General average Article 811 of the Code of Commerce provides that: “As a general rule, general or gross averages shall include all the damages and expenses which are deliberately caused in order to save the vessel, its cargo, or both at the same time, from a real and known risk, and particularly the following: 1. The goods or cash invested in the redemption of the vessel or of the cargo captured by enemies, privateers, or pirates, and the provisions, wages, and expenses of the vessel detained during the time the settlement or redemption is being made; 2. The goods jettisoned to lighten the vessel, whether they belong to the cargo, to the vessel, or to the crew, and the damage suffered through said act by the goods which are kept on board; 3. The cables and masts which are cut or rendered useless, the anchors and the chains which are abandoned, in order to save the cargo, the vessel, or both; 4. The expenses of removing or transferring a portion of the cargo in order to lighten the vessel and place it in condition to enter a port or roadstead, and the damage resulting therefrom to the goods removed or transferred; 5. The damage suffered by the goods of the cargo by the opening made in the vessel in

order to drain it and prevent its sinking; 6. The expenses caused in order to float a vessel intentionally stranded for the purpose of saving it; 7. The damage caused to the vessel which had to be opened, scuttled or broken in order to save the cargo; 8. The expenses for the treatment and subsistence of the members of the crew who may have been wounded or crippled in defending or saving the vessel; 9. The wages of any member of the crew held as hostage by enemies, privateers, or pirates, and the necessary expenses which he may incur in his imprisonment, until he is returned to the vessel or to his domicile, should he prefer it; 10. The wages and victuals of the crew of a vessel chartered by the month, during the time that it is embargoed or detained by force majeure or by order of the government, or in order to repair the damage caused for the common benefit; 11. The depreciation resulting in the value of the goods sold at arrival under stress in order to repair the vessel by reason of gross average; 12. The expenses of the liquidation of the average.” Article 812 of the Code of Commerce provides that: “In order to satisfy the amount of the gross or general averages, all the persons having an interest in the vessel and cargo therein at the time of the occurrence of the average shall contribute.” Article 813 of the Code of Commerce provides that: “In order to incur the expenses and cause the damages corresponding to gross average, there must be a resolution of the captain, adopted after deliberation with the sailing mate and other officers of the vessel, and after hearing the persons interested in the cargo who may be present. If the latter

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro shall object, and the captain and officers or a majority of them, or the captain, if opposed to the majority, should consider certain measures necessary, they may be executed under his responsibility, without prejudice to the right of the shippers to proceed against the captain before the competent judge or court, if they can prove that he acted with malice, lack of skill, or negligence. If the persons interested in the cargo, being on board the vessel, have not been heard, they shall not contribute to the gross average, their share being chargeable against the captain, unless the urgency of the case should be such that the time necessary for previous deliberations was wanting.” Article 816 of the Code of Commerce states that: “In order that the goods jettisoned may be included in the gross average and the owners thereof be entitled to indemnity, it shall be necessary insofar as the cargo is concerned that their existence on board be proven by means of the bill of lading; and with regard to those belonging to the vessel, by means of the inventory prepared before the departure in accordance with the first paragraph of Article 812.” Article 817 of the Code of Commerce states that: “if in lightning a vessel on account of a storm, in order to facilitate its entry into a port or roadstead, part of the cargo should be transferred to lighters or barges and be lost, the owner of said part shall be entitled to indemnity, as if the loss had originated from a gross average, the amount thereof being distributed between the vessel and cargo from which it came. If, on the contrary, the merchandise transferred should be saved and the vessel should be lost, no liability may be demanded of the salvage.” Article 818 of the Code of Commerce states that: “If, as a necessary measure to extinguish a fire in port, roadstead, creek, or

bay, it should be decided to sink any vessel, this loss shall be considered gross average, to which the vessels saved shall contribute.” Article 732 of the Code of Commerce provides that: “Lenders on bottomry or respondentia shall suffer, in proportion to their respective interest, the general average which may take place in the goods on which the loan is made. In particular averages, in the absence of an express agreement between the contracting parties, the lender on bottomry or respondentia shall also contribute in proportion to his respective interest, should it not belong to the kind of risks excepted in the foregoing article.” Article 859 of the Code of Commerce provides that: “The insurers of the vessel of the freightage, and of the cargo shall be obliged to pay for the indemnification of the gross average, insofar as is required of each one of these objects respectively.” Article 860 of the Code of Commerce provides that: “If, notwithstanding the jettison of merchandise, breakage of masts, ropes, and equipment, the vessel should be lost running the same risk, no contribution whatsoever by reason of gross average shall be proper. The owners of the goods saved shall not be liable for the indemnification of those jettisoned, lost, or damaged.” Article 861 of the Code of Commerce provides that: “If, after the vessel has been saved from the risk which gave rise to the jettison, it should be lost through another accident taking place during the voyage, the goods saved and existing from the first risk shall continue liable to contribution by reason of the gross average according to their value in the condition in which they may be found, deducting the expenses incurred in saving them.” Remedy: Reimbursement

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro General Rule: The sacrifice made must be in the course of the voyage. Exceptions: General average exists even if there is no voyage yet: 1. Article 817 of the Code of Commerce which covers fire in the port; and 2. Article 818 of the Code of Commerce which covers transfer of cargo to another vessel for the necessity to enter another port. Requisites: 1. Exposure to common danger to ship and the cargo after it has been loaded whether during voyage or port of loading and unloading; 2. That for the common safety part of the vessel or the cargo or both is sacrificed deliberately; 3. That from the expenses or damages caused follows the successful saving of the vessel and cargo; 4. That the expenses or damages should have been incurred or inflicted after taking legal steps and authority Formalities: 1. There must be a resolution of the captain, adopted after a deliberation with the other officers of the vessel and after hearing all persons interested in the cargoes. If the latter disagree, the decision of the captain should prevail but they shall register their objections. 2. The resolution must be entered in the logbook, stating the reasons and motives for the dissent, and the irresistible and urgent causes if he acted in his own accord. It must be signed, in the first case, by all persons present in the hearing. In the second case, by the captain and all the officers of the vessel. The minutes must also contain a detail of all the goods jettisoned and those injuries caused to those on board. H. Collisions 1. Definition Collision is an impact of two vessels both of which are moving.

Allision is an impact between a moving vessel and a stationary one. Possible damage: a. Damage to vessel b. Loss/damage to cargo c. Injury or death of passenger Example: Q: A and B collided, A was found to be negligent, who bears the consequential damages? A: A shall be liable for the consequential damages for she is at fault. Q: What if A and B were found to be negligent, who bears the consequential damages? A: With regard to the vessel, each vessel shall be liable for their own losses. With regard to the cargoes and passengers, they are solidarily liable. 2. Zones in collision (Doctrine of error in extremis) *Knowing these zones are important for liability purposes. 1. First zone – all time up to the moment when risk of collision begins 2. Second zone – time between moment when risk of collision begins and moment it becomes a practical certainty. *It is in this period where conduct of the vessels is primordial. It is in this zone that vessels must strictly observe nautical rules unless a departure therefrom becomes necessary to avoid imminent danger. 3. Third zone – time when collision is certain and time of impact. *An error in this zone would no longer be legally consequential. Doctrine of Error in Extremis is a sudden movement made by a faultless vessel during the third zone of collision with another vessel which is at fault during the second zone. Even if such sudden movement is wrong, no responsibility will fall on said faultless vessel. Doctrine of Last Clear Chance provides that a negligent defendant is held liable to a negligent plaintiff or even to a plaintiff who has been grossly negligent where he should have been aware of it in the reasonable exercise of due care, had in

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro fact an opportunity later than that of the plaintiff to avoid an accident. *In this doctrine, both parties are at fault but only one party is liable. Only the party who has the last clear opportunity to avoid the impact is held liable. *This doctrine is inapplicable in the following instances: 1. If the suit is between a parties of contract of carriage; and 2. In case of collision of vessels 3. Rule on liability Article 826 of the Code of Commerce provides that: “If a vessel should collide with another, through the fault, negligence, or lack of skill of the captain, sailing mate, or any other member of the complement, the owner of the vessel at fault shall indemnify the losses and damages suffered, after an expert appraisal.” Article 827 of the Code of Commerce provides that: “If the collision is imputable to both vessels, each one shall suffer its own damages, and both shall be solidarily responsible for the losses and damages occasioned to their cargoes.” *This is known as the Doctrine of Inscrutable Fault. Doctrine of Inscrutable Fault provides that in case of collision where it cannot be determined which between the two vessels was at fault, both vessels bear their respective damage, but both should be solidarily liable for damage to the cargo of both vessels. Article 828 of the Code of Commerce states that: “The provisions of the preceding article are applicable to the use in which it cannot be determined which of the two vessels has caused the collision.” Article 829 of the Code of Commerce states that: “In the cases above mentioned the civil action of the owner against the person causing the injury as well as the criminal liabilities, which may be proper, are reserved.” Article 830 of the Code of Commerce states that: “If a vessel should collide with another, through fortuitous event or force majeure, each vessel and its cargo shall bear its own damages.”

Requisites: 1. The natural disaster must have been the proximate and only cause of the loss; 2. The common carrier must have exercised due diligence to prevent or minimize loss before, during and after the occurrence of the natural disaster; 3. The common carrier must not have been guilty of delay; and 4. The captain must have made a protest before the competent authority at the first port he touched within the 24 hours following his arrival, and should have ratified it within the same period when he arrived at the port of destination, proceeding immediately with the proof of the facts, without opening the hatches until after this has been done. Article 831 of the Code of Commerce provides that: “If a vessel should be forced by a third vessel to collide with another, the owner of the third vessel shall indemnify the losses and damages caused, the captain thereof being civilly liable to said owner.” *This is known as the Doctrine of Proximate Cause Article 832 of the Code of Commerce states that: “If by reason of a storm or other cause of force majeure, a vessel which is properly anchored and moored should collide with those nearby, causing them damages, the injury occasioned shall be considered as particular average of the vessel run into.” 4. Limited liability rule *There must be no fault on the part of the shipowner. *The fault falls only with his crew. Article 837 of the Code of Commerce states that: “The civil liability incurred by the shipowners in the case prescribed in this section, shall be understood as limited to the value of the vessel with all its appurtenances and freightage.” I.

Arrival under stress 1. Concept The arrival of a vessel at the nearest and most convenient port instead of the port of destination, if during the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro voyage the vessel cannot continue the trip to the port of destination. Article 819 of the Code of Commerce provides that: “If during the voyage the captain should believe that the vessel can not continue the trip to the port of destination on account of the lack provisions, well founded fear of seizure, privateers, or pirates, or by reason of any accident of the sea disabling it to navigate, he shall assemble the officers and shall summon the persons interested in the cargo who may be present, and who may attend the meeting without the right to vote; and if, after examining the circumstances of the case, the reason should be considered wellfounded, the arrival at the nearest and most convenient port shall be agreed upon, drafting and entering the proper minutes, which shall be signed by all, in the log book. The captain shall have the deciding vote, and the persons interested in the cargo, may make the objections and protests they may deem proper, which shall be entered in the minutes in order that they may make use thereof in the manner they may consider advisable.” 2. When improper Article 820 of the Code of Commerce provides that: “An arrival shall not be considered lawful in the following cases: 1. If the lack of provisions should arise from the failure to take the necessary provisions for the voyage according to usage and customs, or if they should have been rendered useless or lost through bad stowage or negligence in their care; 2. If the risk of enemies, privateers, or pirates should not have been well known, manifest, and based on positive and provable facts; 3. If the defect of the vessel should have arisen from the fact that it was not repaired, rigged, equipped, and prepared in a manner suitable for the voyage, or from some erroneous order of the captain; 4. When malice, negligence, want of foresight, or lack of skill on the part of the captain exists in the act causing the damage.”

3. Expenses Article 821 of the Code of Commerce provides that: “The expenses of an arrival under stress shall always be for the account of the shipowner or agent, but they shall not be liable for the damages which may be caused the shippers by reason of the arrival, provided the latter is legitimate. Otherwise, the ship agent and the captain shall be jointly liable.” Article 822 of the Code of Commerce provides that: “If in order to make repairs to the vessel or because there is danger that the cargo may suffer, it should be necessary to unload, the captain must request the authorization from the competent judge or court for the removal, and carry it out with the knowledge of the person interested in the cargo, or his representative, should there be any. In a foreign port, it shall be the duty of the Philippine Consul, where there is one, to give the authorization. In the first case, the expenses shall be for the account of the ship agent or owner, and in the second, they shall be chargeable against the owners of the merchandise for whose benefit the act was performed. If the unloading should take place for both reasons, the expenses shall be divided proportionately between the value of the vessel and that of the cargo.” 4. Custody of Cargo Article 823 of the Code of Commerce provides that: “The custody and preservation of the cargo which has been unloaded shall be intrusted to the captain, who shall be responsible for the same, except in cases of force majeure.” Article 824 of the Code of Commerce states that: “If the entire cargo or part thereof should appear to be damaged, or there should be imminent danger of its being damaged, the captain may request of the competent judge or court, or of the consul in a proper case, the sale of all or of part of the former, and the person taking cognizance of the matter shall authorize it, after an examination and declaration of experts, advertisements, and other formalities required by the case, and an entry in

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro the book, in accordance with the provisions of Article 624. The captain shall, in proper case, justify the legality of his conduct, under the penalty of answering to the shipper for the price the merchandise would have brought if they had arrived in good condition at the port of destination.” 5. Captain’s liability Article 825 of the Code of Commerce states that: “The captain shall be responsible for the damages caused by his delay, if after the cause of the arrival under stress has ceased, he should not continue the voyage. If the cause of arrival should have been the fear of enemies, privateers, or pirates, a deliberation and resolution in a meeting of the officers of the vessel and persons interested in the cargo who may be present, in accordance with the provisions contained in Article 819, shall precede the departure.” 6. Rules in case of shipwreck Shipwreck denotes all types of loss/ wreck of a vessel at sea either by being swallowed up by the waves, by running against another vessel or thing at sea or on coast where the vessel is rendered incapable of navigation. Article 840 of the Code of Commerce provides that: “The losses and deteriorations by a vessel and her cargo by reason of shipwreck or stranding shall be individually for the account of the owners, the part which may be saved belonging to them in the same proportion.” Article 841 of the Code of Commerce states that: “If the wreck or stranding should be caused by the malice, negligence, or lack of skill of the captain, or because the vessel put to sea was insufficiently repaired and equipped, the ship agent or the shippers may demand indemnity of the captain for the damages caused to the vessel or to the cargo by the accident, in accordance with the provisions contained in Articles 610, 612, 614, and 621.” Article 842 of the Code of Commerce states that: “The goods saved from the wreck shall be specially bound for the payment of the expenses of the respective salvage, and the amount thereof must be paid

by the owners of the former before they are delivered to them, and with preference over any other obligation if the merchandise should be sold.” Article 843 of the Code of Commerce states that: “If several vessels sail under convoy, and any of them should be wrecked, the cargo saved shall be distributed among the rest in proportion to the amount which each one is able to take. If any captain should refuse, without sufficient cause, to receive what may correspond to him, the captain of the wrecked vessel shall enter a protest against him, before two sea officials, of the losses and damages resulting therefrom, ratifying the protest within 24 hours after arrival at the first port, and including it in the proceedings he must institute in accordance with the provisions contained in Article 612. If it is not possible to transfer to the other vessels the entire cargo of the vessel wrecked, the goods of the highest value and smallest volume shall be saved first, the designation thereof to be made by the captain with the concurrence of the officers of his vessel.” Article 844 of the Code of Commerce provides that: “A captain who may have taken on board the goods saved from the wreck shall continue his course to the port of destination, and on arrival shall deposit the same, with judicial intervention, at the disposal of their legitimate owners. In case he changes his course, if he can unload them at the port of which they were consigned, the captain may make said port if the shippers or supercargoes present and the officers and passengers of the vessel consent thereto; but he may not do so, even with said consent, in time of war or when the port is difficult and dangerous to make. The owners of the cargo shall defray all the expenses of this arrival as well as the payment of the freightage which, after taking into consideration the circumstances of the case, may be fixed by agreement or by a judicial decision.” Article 845 of the Code of Commerce provides that: “If on the vessel there should be no person

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro interested in the cargo who can pay the expenses and freightage corresponding to the salvage, the competent judge or court may order the sale of the part necessary to cover the same. This shall also be done when its preservation is dangerous, or when in a period of one year it should not have been possible to ascertain who are its legitimate owners. In both cases the proceedings shall be with the publicity and formalities prescribed in Article 579, and the net proceeds of the sale shall be safely deposited, in the discretion of the judge or court, so that they may be delivered to the legitimate owner thereof.” *It is the loss of the vessel at sea as a consequence of its grounding, or running against an object in sea or on the coast. It occurs when the vessel sustains injuries due to a marine peril rendering her incapable of navigation. *The rules on collision or allusion, as may be pertinent, can equally apply to shipwrecks. J.

Salvage 1. Definition Salvage - Compensation allowed to persons by whose voluntary assistance a ship at sea or her cargo or both have been saved in whole or in part from an impending or actual peril, shipwrecks, derelicts or recapture - Services one person render to the owner of a ship or goods, by his own labor, preserving the goods or the ship which the owner or those entrusted with the care of them have either abandoned in distress at sea, or are unable to protect or secure. 2. Rights and obligations of salvors and owners (Salvage Law) Salvors Entitled to compensation for services rendered Acquires a lien upon the property salvaged until he is compensated

To all intents and purposes, he is a

Owners He does not renounce his right to the derelict Has a right to the delivery of the vessel or things saved after the salvage is accomplished, provided he pays or gives a bond Should make a claim within 3

joint owner and if the property is lost he must bear his share Acquires the right of possession of derelict for purposes of a salvage claim

months after the publication of a salvage report, otherwise the thing saved shall be sold Entitled to the salvage reward for the use of his vessel in rendering salvage services

Entitled to half of the deposit of the derelict sold, if after the lapse of 3 years no claim was made WARSAW CONVENTION: Warsaw Convention is an agreement among sovereign countries concerning the regulation in a uniform manner of the conditions of international transportation by air in respect of the documents used for such transportation and of the liability of the carrier. Signed on October 12, 1929 in Warsaw, Poland. Purpose: To protect the emerging air transportation industry and to secure the uniformity of recovery by the passengers. Applicability: The transportation must be: 1. International transportation 2. Air transportation 3. Carriage of passengers, baggage or goods *The Warsaw Convention shall also apply to fortuitous events affecting transportation by aircraft performed by an air transportation enterprise. *The Convention is likewise applicable to air transportation by legal entities constituted under public law of the High Contracting Parties. *The Convention does not apply to transportation performed under the terms of any international postal convention. International Transportation is any transportation in which the place of departure and the place of destination are situated either: 1. Within the territories of two High Contracting Parties regardless of whether or not there be a break in the transportation or transhipment; or Controlling: Two territories must be High Contracting Parties *Also called as one way ticket 2. Within the territory of a single High Contracting Parties, if there is an agreed stopping place within a territory subject to the sovereignty, mandate or authority of

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro another power, even though that power is not a party to the Convention. Controlling: There must be a stopping place in another territory. *Also called as round trip ticket. High Contracting Party is one of the original parties to the convention. When inapplicable: 1. When public policy is contradicted; 2. If the requirement under the Convention are not complied with Transportation Documents: a. Passenger – passenger ticket b. Checked-in baggage – baggage check c. Goods to be shipped – airway bill Liability of carrier for damages: 1. Death or injury of a passenger if the accident causing it took place on board the aircraft or in the course of its operations of embarking or disembarking; 2. Destruction, loss or damage to any baggage or goods, if it took place during the transportation by air; and 3. Delay in the transportation of passengers, baggage or goods. Limit of Liability: 1. Passenger: In case of death or injury, general rule: 100,000 STR per passenger *1.51 US Dollar Exception: Agreement to a higher limit In case of delay, 4150 STR per passenger 2. Checked in baggage: General Rule: 20 STR per kilogram Exception: In case of special declaration of value and payment of a supplementary sum by consignor, carrier is liable to not more than the declared sum unless it proves the sum is greater than actual value. 3. Hand carried baggage: 1000 STR per passenger 4. Goods to be shipped: General Rule: 17 STR per kilogram Exception: In case of special declaration of value and payment of a supplementary sum by consignor, carrier is liable to not more than the declared sum unless it proves the sum is greater than actual value. Action for damages: 1. Notice of claim *A written complaint must be made within: 3 days from receipt of baggage; 7 days from receipt of goods; in case of delay, 14 days from receipt of baggage/goods. *The complaint is a condition precedent. Without the complaint, the

action is barred except in case of fraud on the part of the carrier. 2. Prescriptive period *Action must be filed within 2 years from: a. The date of arrival at the destination *An intermediate place where carriage may be broken is not a place of destination. b. The date of expected arrival c. The date on which the transportation stopped Venue: At the option of the plaintiff, the action for damages may be filed in the: 1. Court of domicile of the carrier; 2. Court of its principal place of business; 3. Court where it has a place of business through which the contract has been made; or 4. Court of the place of destination. *In Santos III v Northwest Airline, the SC held that the forum of action is a matter of jurisdiction rather than of venue.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro

BANKING LAW (R.A. 8791) General Banking Law: Sec. 3 of the General Banking Law provides that: "Banks" shall refer to entities engaged in the lending of funds obtained in the form of deposits.” Sec. 8 of the General Banking Law provides that: “The Monetary Board may authorize the organization of a bank or quasi-bank subject to the following conditions: 8.1 That the entity is a stock corporation; 8.2 That its funds are obtained from the public, which shall mean twenty (20) or more persons; and 8.3 That the minimum capital requirements prescribed by the Monetary Board for each category of banks are satisfied. No new commercial bank shall be established within three (3) years from the effectivity of this Act. In the exercise of the authority granted herein, the Monetary Board shall take into consideration their capability in terms of their financial resources and technical expertise and integrity. The bank licensing process shall incorporate an assessment of the bank’s ownership structure, directors and senior management, its operating plan and internal controls as well as its projected financial condition and capital base.” *To be registered as bank, it must be a stock corporation. *Banks must obtain funds from the public. Minimum number of depositor is 20 persons. Nature of Business: Sec. 2 of the General Banking Law states that: “The State recognizes the vital role of banks providing an environment conducive to the sustained development of the national economy and the fiduciary nature of banking that requires

high standards of integrity and performance. In furtherance thereof, the State shall promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy.” Consequences: 1. Sec. 9 of the General Banking Law provides that: “The Monetary Board may prescribe rules and regulations on the types of stock a bank may issue, including the terms thereof and rights appurtenant thereto to determine compliance with laws and regulations governing capital and equity structure of banks; Provided, That banks shall issue par value stocks only.” 2. Bank must be an open corporation Reason: Vital to industry 3. The word “bank” cannot be used if such person or entity is not engaged in banking business. 4. It is subject to heavy and close supervision and/or regulation by the Bangko Sentral ng Pilipinas. 5. Banks must observe highest degree of diligence. 6. Sec. 22 of the General Banking Law states that: “The banking industry is hereby declared as indispensable to the national interest and, notwithstanding the provisions of any law to the contrary, any strike or lockout involving banks, if unsettled after seven (7) calendar days shall be reported by the Bangko Sentral to the Secretary of Labor who may assume jurisdiction over the dispute or decide it or certify the same to the National Labor Relations Commission for compulsory arbitration. However, the President of the Philippines may at any time intervene and assume jurisdiction over such labor dispute in order to settle or terminate the same.” *In DBP v CA, the SC held that while an innocent mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagor’s title, in case of a banking institution, it must exercise due diligence before entering into said contract, and cannot rely upon on what is or is not annotated on the title. Cases: China Banking v Lagon; Citibank v Cabangongan Authority to incorporate and operate: Sec. 14 of the General Banking Law states that: “The Securities and Exchange Commission shall not register 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 unless the

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Monetary Board is satisfied from the evidence submitted to it: 14.1. That all requirements of existing laws and regulations to engage in the business for which the applicant is proposed to be incorporated have been complied with; 14.2. That the public interest and economic conditions, both general and local, justify the authorization; and 14.3. That the amount of capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of deposits and the public interest. The Securities and Exchange Commission shall not register the by-laws of any bank, or any amendment thereto, unless accompanied by a certificate of authority from the Bangko Sentral.” *The articles of incorporation must be accompanied by the favorable recommendation of the BSP. Sec. 6 of the General Banking Law provides that: “No person or entity shall engage in banking operations or quasi-banking functions without authority from the Bangko Sentral: Provided, however, That an entity authorized by the Bangko Sentral to perform universal or commercial banking functions shall likewise have the authority to engage in quasi-banking functions. The determination of whether a person or entity is performing banking or quasi-banking functions without Bangko Sentral authority shall be decided by the Monetary Board. To resolve such issue, the Monetary Board may; through the appropriate supervising and examining department of the Bangko Sentral, examine, inspect or investigate the books and records of such person or entity. Upon issuance of this authority, such person or entity may commence to engage in banking operations or quasi-banking function and shall continue to do so unless such authority is sooner surrendered, revoked, suspended or annulled by the Bangko Sentral in accordance with this Act or other special laws. The department head and the examiners of the appropriate supervising and examining department are hereby authorized to administer oaths to any such person, employee, officer, or director of any such entity and to compel the presentation or production of such books, documents, papers or records that are reasonably necessary to ascertain the facts relative to the true functions and operations of such person or entity. Failure or refusal to comply with the required presentation or production of such books, documents, papers or records within a reasonable time shall subject the persons responsible therefore to the penal sanctions provided under the New Central Bank Act.

Persons or entities found to be performing banking or quasi-banking functions without authority from the Bangko Sentral shall be subject to appropriate sanctions under the New Central Bank Act and other applicable laws.” Classification of banks: Sec. 3.2 of the General Banking Law provides that: “Banks shall be classified into: (a) Universal banks; (b) Commercial banks; (c) Thrift banks, composed of: (i) Savings and mortgage banks; (ii) Stock savings and loan associations; and (iii) Private development banks, as defined in the Republic Act No. 7906 (hereafter the “Thrift Banks Act”); (d) Rural banks, as defined in Republic Act No. 73S3 (hereafter the "Rural Banks Act"); (e) Cooperative banks, as defined in Republic Act No 6938 (hereafter the "Cooperative Code"); (f) Islamic banks as defined in Republic Act No. 6848, otherwise known as the “Charter of Al Amanah Islamic Investment Bank of the Philippines”; and (g) Other classifications of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas.” Distinctions banks:

between

different

kinds

of

a. As to Capitalization: They have different minimum capitalization requirements. b. As to Purpose: Some of the banks have specific purposes and social functions. c. As to Powers or Functions: There are functions and powers that are not exercised by one that are exercised by others. Some banks may exercise certain powers only upon prior approval of the Monetary Board. *Universal banks can engage into nonallied enterprises. It can also act as an investment house, thus, it can enter into underwriting commitments and do underwriting securities. d. As to who can be directors: Public officers can be directors of Rural Banks while such officers are prohibited from being directors or officers of other types of banks. e. As to Incorporators: General Rule: Incorporators must be natural persons. Exception: In rural banks, it can be organized or established by cooperatives and corporations primarily organized to hold equities in rural banks.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro f.

As to Foreign Equity: A rural bank must be wholly owned by Filipinos while other banks require only 40% Filipino ownership of their voting stocks. *In RA 6938, majority of the shares must be owned by cooperatives. g. As to necessity of public offering: Public offering of shares is necessary for domestic banks seeking authority to act as universal bank while there is no such requirement for other banks. Functions of the bank: 1. Deposit Functions 2. Loan Functions Deposit Function: *The relationship created is one of creditor-debtor relation. *There is passing of ownership to the bank. *The bank can appropriate the deposits without the consent of the depositor. *Legal compensation can take place because they are mutually creditor-debtor of each other. *Prior to incorporation, the deposits can be named to corporate treasurer. He will held it in trust for the corporation. Depositors: 1. Minors: - They can open bank accounts in their own right provided that they are at least 7 years of age; they are able to read and write and have sufficient discretion; they are not otherwise disqualified by any other incapacity; and it should only be savings or time deposits. * They cannot open checking account nor demand deposits. 2. Married Women: - They are allowed to open bank accounts without the assistance of their husbands. Reason: equality in capacity *Bank account may be opened by one individual or two or more persons. Whenever two or more persons open an account, the same may be an “and/or account” or an “and account”. General Rule: Fictitious accounts or anonymous accounts are prohibited. Exception: Foreign currency deposits which may be a numbered account. *The law requires that necessary measures are undertaken by the bank to record and establish the true identity of the depositor. *Joint accounts may be the subject of survivorship agreement whereby the codepositors agree to permit either of them to withdraw the whole deposit during their lifetime and transferring the balance to the survivor upon the death of one of them. Basis: Trust and Confidence

*What is prohibited under the Family Code is donation inter vivos and not donation mortis causa. Secrecy of Bank Deposits: Peso deposits: General Rule: Sec. 2 of Republic Act No. 1405 provides that: “All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, governmental official, bureau or office.” Exceptions: 1. When there is written permission of the depositor or investor; 2. Impeachment cases; 3. Upon the order of a competent court in cases of bribery or dereliction of duty of public officials; 4. Upon the order of a competent court in cases where the money deposited or invested is the subject of litigation; 5. Upon order of the competent court or tribunal in cases involving unexplained wealth under Sec. 8 of the Anti-Graft and Corrupt Practices Act (R.A. 3019); 6. Upon inquiry by the Commissioner of Internal Revenue for the purpose of determining the net estate of a deceased depositor; *In case the taxpayer compromised his tax liability by reason of financial incapacity. 7. General Rule: Upon the order of a competent court or in proper cases by the Anti-Money Laundering Council where there is probable cause of money laundering. Exception: In some instances even without court order. 8. Disclosure of the Treasurer of the Philippines for dormant deposits for at least 10 years under the Unclaimed Balances Act (R.A. 3936) *Escheat proceedings Foreign Currency deposits: *Subsequent to secrecy law. Under the Foreign Currency Deposit Act, there is only one exception and that is: When there is a written consent of depositor. Secrecy of Deposits under the Anti-Money Laundering Law: General Rule: The Anti-Money Laundering Council may inquire into deposits upon order of the court when there is probable cause that the deposits are related to the crime of unlawful

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro activities defined in Sec. 3(1) and Sec. 4 of R.A. 9160 as amended by R.A. 9194. Exception: A court order is not even necessary when the offense or unlawful activity involved is any of the following: 1. Kidnapping for ransom under Article 267 of the Revised Penal Code; 2. Sections 4, 5, 7, 8, 9, 10, 12, 13, 14, 15, and 16 of the Comprehensive Dangerous Drugs Act of 2002; and Hi-jacking and other violations under R.A. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended, including those perpetrated by terrorists against non-combatant persons and similar targets. Garnishment: General Rule: Bank accounts may be garnished by the creditors of the depositor. Reason: Not deposits for investment, thus, law on secrecy is not applicable. Exceptions: 1. Foreign Currency Deposits *In Salvacion v Central Bank of the Philippines, the SC held that foreign currency deposits of an American tourist who was found guilty of repeatedly raping a twelve years old child is subject to garnishment. 2. Those exempt under the Rules of Civil Procedure like provision for the family for four months Deposit Insurance: *All deposits of any bank are insured with the PDIC. *Obligation to pay the premium lies on the bank. Risk insured against: closure of banks due to liquidity problems. *Insured deposit under the law means the net amount due to any depositor for deposits in an insured bank but should not exceed P250,000. If the depositor has two or more accounts with the same bank, the maximum coverage of P250,000 pertains to the sum of all such accounts maintained in the same right and capacity. *A joint account shall be insured separately from any individual-owned account. *A joint account held by a juridical person or entity jointly with natural person/s shall be presumed to belong to the juridical person. *The aggregate share in all joint accounts is subject to P250,000 threshold. Loan Function of the Banks: *A bank shall grant loans and other credit accommodations only in amounts and for the periods of time essential for the effective completion of the operations to be financed. Single Borrower’s Limit:

Sec. 35.1 of the General Banking Law provides that: “Except as the Monetary Board may otherwise prescribe for reasons of national interest, the total amount of loans, credit accommodations and guarantees as may be defined by the Monetary Board that may be extended by a bank to any person, partnership, association, corporation or other entity shall at no time exceed twenty-five percent (25%) of the net worth of such bank. The basis for determining compliance with single borrower limit is the total credit commitment of the bank to the borrower. Sec. 35.2 of the General Banking Law states that: “Unless the Monetary Board prescribes otherwise, the total amount of loans, credit accommodations and guarantees prescribed in the preceding paragraph may be increased by an additional ten percent (10%) of the net worth of such bank 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.” DOSRI ACCOUNTS: Sec. 36 of the General Banking Law states that: “No director or officer of any bank shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank nor shall he become a guarantor, endorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank except with the written approval of the majority of all the directors of the bank, excluding the director concerned: Provided, That such written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the Bangko Sentral. The required approval shall be entered upon the records of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the Bangko Sentral. Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less favorable to the bank than those offered to others. After due notice to the board of directors of the bank, the office of any bank director or officer who violates the provisions of this Section may be declared vacant and the director or officer shall be subject to the penal provisions of the New Central Bank Act. The Monetary Board may regulate the amount of loans, credit accommodations and guarantees that may be extended, directly or indirectly, by a bank to its directors, officers, stockholders and their related interests, as well as investments of such bank in enterprises owned

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro or controlled by said directors, officers, stockholders and their related interests. However, the outstanding loans, credit accommodations and guarantees which a bank may extend to each of its stockholders, directors, or officers and their related interests, shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank: Provided, however, That loans, credit accommodations and guarantees secured by assets considered as non-risk by the Monetary Board shall be excluded from such limit: Provided, further, That loans, credit accommodations and advances to officers in the form of fringe benefits granted in accordance with rules as may be prescribed by the Monetary Board shall not be subject to the individual limit. The Monetary Board shall define the term “related interests.” The limit on loans, credit accommodations and guarantees prescribed herein shall not apply to loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders.” Purpose: To protect the general public from the abuse of the directors, officers, stockholders and related interests of the bank. Requisites: 1. The borrower is a director, officer or any stockholder of a bank; 2. He contract a loan or any form of financial accommodation; 3. The loan or financial accommodation is from: a. his bank, or b. a bank that is a subsidiary of a bank holding company of which both his bank and lending bank are subsidiaries, c. a bank in which a controlling proportion of the shares is owned by the same interest that owns a controlling proportion of the shares of his bank; and 4. The loan or financial accommodation of the director, officer or stockholder, singly or with that of his related interest, is in excess of 5% of the capital and surplus of the lending bank or in the maximum amount permitted by law, whichever is lower. Examples: 1. If there is interlocking directors – subject to DOSRI restrictions 2. General partner is either a director, officer, stockholder or related interest of a lending bank – subject to DOSRI restrictions 3. Stranger applied for a loan and a property was collateral: a. if the property is owned by stranger alone – not subject to DOSRI restrictions; b. if the property is co-owned by a director, officer, stockholder or related interest of the bank – subject to DOSRI restrictions 4. A director, officer, stockholder, or related interests owned more than 20% share in a

corporation (borrower) – subject to DOSRI restriction. Restrictions: 1. Procedural requirement: The account should be upon written approval of all the director of the lending bank excluding the director concerned. 2. Arms Length Rule: The account should be upon terms not less favorable to the bank than those offered to others. 3. Reportorial requirement: The resolution approving the loan shall be entered in the records of the bank and a copy of the entry shall be transmitted forthwith to the Supervising and Examination Sector of the BSP. Foreclosure of Mortgage Sec. 47 of the General Banking Law provides that: “In the event of foreclosure, whether judicially or extra-judicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived there from. However, the purchaser at the auction sale concerned whether in a judicial or extra-judicial foreclosure shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. Notwithstanding Act 3135,juridical persons whose property is being sold pursuant to an extra judicial foreclosure, shall have the right to redeem the property in accordance with this provision 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 than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration.” Prohibited acts of Borrowers:

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Sec. 55.2 of the General Banking Law states that: “No borrower of a bank shall (a) Fraudulently overvalue property offered as security for a loan or other credit accommodation from the bank; (b) Furnish false or make misrepresentation or suppression of material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending the period thereof; (c) Attempt to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or (d) Offer any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application.”

A Corporation which is not a banking institution – 500,000 shares *A domestic non-bank corporation can only own upto 40% of the voting stock of the bank. 800,000 owned by Filipinos; 200,000 owned by foreigners In the 800,000 owned by Filipinos; 400,000 of which is owned by A and the 200,000 is owned by A Corporation In A Corporation, A is a stockholder owning 50% of the controlling stock of A Corporation. Q: Is this allowed? A: NO. 50% of 200,000 is indirectly owned by a Filipino individual, the 40% threshold is violated. *The 40% threshold includes both direct and indirect ownership of shares of the bank.

Ownership of Banks:

Act Liberalizing Entry of Foreign Banks:

Sec. 11 of the General Banking Law provides that: “Foreign individuals and non-bank corporations may own or control up to forty percent (40%) of the voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations. The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation.” General Rule: Banks are partly nationalized *The 60% minimum threshold must be satisfied by the bank. *Filipino ownership – voting stocks owned by Filipinos Examples: X bank has 1M voting stocks: 600,000 owned by Filipinos and 400,000 owned by foreigners. The bank complied with the 60% requirement.

Sec. 2 of Republic Act No. 7721 provides that: “The Monetary Board may authorize foreign banks to operate in the Philippine banking system through any of the following modes of entry: (i) by acquiring, purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank; (ii) by investing in up to sixty percent (60%) of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or (iii) by establishing branches with full banking authority: Provided, That a foreign bank may avail itself of only one (1) mode of entry: Provided, further, That a foreign bank or a Philippine corporation may own up to a sixty percent (60%) of the voting stock of only one (1) domestic bank or new banking subsidiary.” Sec. 3 of Republic Act No. 7721 states that: “In approving entry applications of foreign banks, the Monetary Board shall: (i) ensure geographic representation and complementation; (ii) consider strategic trade and investment relationships between the Philippines and the country of incorporation of the foreign bank; (iii) study the demonstrated capacity, global reputation for financial innovations and stability in a competitive environment of the applicant; (iv) see to it that reciprocity rights are enjoyed by Philippine banks in the applicant's country; and (v) consider willingness to fully share their technology. Only those among the top one hundred fifty (150) foreign banks in the world or the top five (5) banks in their country of origin as of the date of application shall be allowed entry in accordance with Section 2 (ii) and (iii) hereof. In the exercise of this authority, the Monetary Board shall adopt such measures as may be necessary to: (i) ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by

X bank has 1M voting shares: 400,000 owned by Filipinos; 400,000 owned by foreigners and 200,000 owned by Y Corporation. Q: Does the 60% requirement satisfied? A: IT DEPENDS. Depending on the citizenship of Y Corporation. If the majority controlling stockholders are Filipino thus Y Corporation is a Filipino citizen hence the 60% is complied with. If Y corporation is controlled by a foreigners there is non-compliance of the 60% requirement. *The 40% requirement is applicable not only to foreigners but also to individual Filipino shareholders and domestic non-bank corporation. *If the corporation acquiring is a bank the 40% threshold is not applicable. Examples: 600,000 owned by Filipinos; 400,000 owned by foreigners A – owned 500,000 shares *A single Filipino stockholders can only own upto 40% of the voting stock of the bank.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro domestic banks which are at least majorityowned by Filipinos; (ii) prevent a dominant market position by one bank or the concentration of economic power in one or more financial institutions, or in corporations, participations, partnerships, groups or individuals with related interests; and (iii) secure the listing in the Philippine Stock Exchange of the shares of stocks of banking corporations established under Section 2(i) and (ii) of this Act: Provided, That said banking corporations shall establish stock option plans for their officers and employees as the resources or assets of these corporations may allow in the best business judgment of their respective boards of directors, pursuant to the Corporation Code of the Philippines. To qualify to establish a branch or a subsidiary, the foreign bank applicant must be widely-owned and publicly-listed in its country of origin, unless the foreign bank applicant is owned by the government of its country of origin.” General Rule: Foreigners must own only upto 40% of the voting shares of a bank. Exception: Foreign bank can own upto 60% of the voting shares of a bank. Directors and Officers: Composition: Sec. 15 of the General Banking Law states that: “The provisions of the Corporation Code to the contrary notwithstanding, there shall be at least five (5), and a maximum of fifteen (15) members of the board or directors of a bank, two (2) of whom shall be independent directors. An "independent director" shall mean a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests. Non-Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank. The meetings of the board of directors may be conducted through modern technologies such as, but not limited to, teleconferencing and videoconferencing.” Sec. 19 of the General Banking Law states that: “Except as otherwise provided in the Rural Banks Act, no appointive or elective public official 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 government owned or controlled corporation to the bank or unless otherwise provided under existing laws.” General Rule: The Board of Directors is composed of 5 to 15 members only. Exception: In case of merger Sec. 16 of the General Banking Law provides that: “To maintain the quality of bank

management and afford better protection to depositors and the public in general the Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit. 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. 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.” Justification: Police power Reason: Banking institution is imbued with public interest. Regulations security:

to

maintain

liquidity

and

1. Sec. 34 of the General Banking Law provides that: “The Monetary Board shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts. For purposes of this Section, the Monetary Board may require such ratio be determined on the basis of the net worth and risk assets of a bank and its subsidiaries, financial or otherwise, as well as prescribe the composition and the manner of determining the net worth and total risk assets of banks and their subsidiaries: Provided, That in the exercise of this authority, the Monetary Board shall, to the extent feasible conform to internationally accepted standards, including those of the Bank for International Settlements (BIS), relating to risk-based capital requirements: Provided further, That it may alter or suspend compliance with such ratio whenever necessary for a maximum period of one (1) year: Provided, finally, That such ratio shall be applied uniformly to banks of the same category. In case a bank does not comply with the prescribed minimum ratio, the Monetary Board may limit or prohibit the distribution of net profits by such bank and may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met The Monetary Board may, furthermore, restrict or prohibit the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable evidences of indebtedness of the Republic of the Philippines and of

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro the Bangko Sentral and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the Republic of the Philippines, until the minimum required capital ratio has been restored. In case of a bank merger or consolidation, or when a bank is under rehabilitation under a program approved by the Bangko Sentral, Monetary Board may temporarily relieve the surviving bank, consolidated bank, or constituent bank or corporations under rehabilitation from full compliance with the required capital ratio under such conditions as it may prescribe. Before the effectivity of rules which the Monetary Board is authorized to prescribe under this provision, Section 22 of the General Banking Act, as amended, Section 9 of the Thrift Banks Act, and all pertinent rules issued pursuant thereto, shall continue to be in force.” 2. The law imposes limits on loans, credit accommodations and guarantees that may be extended by banks. 3. Sec. 36 of the General Banking Law states that: “No director or officer of any bank shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank nor shall he become a guarantor, endorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank except with the written approval of the majority of all the directors of the bank, excluding the director concerned: Provided, That such written approval shall not be required for loans, other credit accommodations and advances granted to officers under a fringe benefit plan approved by the Bangko Sentral. The required approval shall be entered upon the records of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the Bangko Sentral. Dealings of a bank with any of its directors, officers or stockholders and their related interests shall be upon terms not less favorable to the bank than those offered to others. After due notice to the board of directors of the bank, the office of any bank director or officer who violates the provisions of this Section may be declared vacant and the director or officer shall be subject to the penal provisions of the New Central Bank Act. The Monetary Board may regulate the amount of loans, credit accommodations and guarantees that may be extended, directly or indirectly, by a bank to its

directors, officers, stockholders and their related interests, as well as investments of such bank in enterprises owned or controlled by said directors, officers, stockholders and their related interests. However, the outstanding loans, credit accommodations and guarantees which a bank may extend to each of its stockholders, directors, or officers and their related interests, shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank: Provided, however, That loans, credit accommodations and guarantees secured by assets considered as nonrisk by the Monetary Board shall be excluded from such limit: Provided, further, That loans, credit accommodations and advances to officers in the form of fringe benefits granted in accordance with rules as may be prescribed by the Monetary Board shall not be subject to the individual limit. The Monetary Board shall define the term “related interests.” The limit on loans, credit accommodations and guarantees prescribed herein shall not apply to loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders.” 4. The law imposes restrictions on the value of collaterals on loans. 5. Sec. 41 of the General Banking Law provides that: “The Monetary Board is hereby authorized to issue such regulations as it may deem necessary with respect to unsecured loans or other credit accommodations that may be granted by banks.” 6. Sec. 43 of the General Banking Law provides that: “The Monetary Board, may, similarly in accordance with the authority granted to it in Section 106 of the New Central Bank Act, and taking into account the requirements of the economy for the effective utilization of long-term funds, prescribe the maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations. Any change by the Board in the maximum maturities shall apply only to loans and other credit accommodations made after the date of such action. The Monetary Board shall regulate the interest imposed on micro finance borrowers by lending investors and similar lenders such as, but not

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro limited to, the unconscionable rates of interest collected on salary loans and similar credit accommodations.” 7. Sec. 57 of the General Banking Law states that: “No bank or quasi-bank shall declare dividends, if at the time of declaration: 57.1 Its clearing account with the Bangko Sentral is overdrawn; or 57.2 It is deficient in the required liquidity floor for government deposits for five (5) or more consecutive days, or 57.3 It does not comply with the liquidity standards/ratios prescribed by the Bangko Sentral for purposes of determining funds available for dividend declaration; or 57.4 It has committed a major violation as may be determined by the Bangko Sentral.” Other functions Sentral:

of

the

Bangko

A. Emergency Loan Sec. 84 of the New Central Bank Act states that: “In periods of national and/or local emergency or of imminent financial panic which directly threaten monetary and banking stability, the Monetary Board may, by a vote of at least five (5) of its members, authorize the Bangko Sentral to grant extraordinary loans or advances to banking institutions secured by assets as defined hereunder: Provided, That while such loans or advances are outstanding, the debtor institution shall not, except upon prior authorization by the Monetary Board, expand the total volume of its loans or investments. The Monetary Board may, at its discretion, likewise authorize the Bangko Sentral to grant emergency loans or advances to banking institutions, even during normal periods, for the purpose of assisting a bank in a precarious financial condition or under serious financial pressures brought by unforeseen events, or events which, though foreseeable, could not be prevented by the bank concerned: Provided, however, That the Monetary Board has ascertained that the bank is not insolvent and has the assets defined hereunder to secure the advances: Provided, further, That a concurrent vote of at least five (5) members of the Monetary Board is obtained. The amount of any emergency loan or advance shall not exceed the sum of fifty percent (50%) of total deposits and deposit substitutes of the banking institution and shall be disbursed in

two (2) or more tranches. The amount of the first tranche shall be limited to twenty-five percent (25%) of the total deposit and deposit substitutes of the institution and shall be secured by government securities to the extent of their applicable loan values and other unencumbered first class collaterals which the Monetary Board may approve: Provided, That if as determined by the Monetary Board, the circumstances surrounding the emergency warrant a loan or advance greater than the amount provided hereinabove, the amount of the first tranche may exceed twenty-five percent (25%) of the bank's total deposit and deposit substitutes if the same is adequately secured by applicable loan values of government securities and unencumbered first class collaterals approved by the Monetary Board, and the principal stockholders of the institution furnish an acceptable undertaking to indemnify and hold harmless from suit a conservator whose appointment the Monetary Board may find necessary at any time. Prior to the release of the first tranche, the banking institution shall submit to the Bangko Sentral a resolution of its board of directors authorizing the Bangko Sentral to evaluate other assets of the banking institution certified by its external auditor to be good and available for collateral purposes should the release of the subsequent tranche be thereafter applied for. The Monetary Board may, by a vote of at least five (5) of its members, authorize the release of a subsequent tranche on condition that the principal stockholders of the institution: (a) furnish an acceptable undertaking to indemnify and hold harmless from suit a conservator whose appointment the Monetary Board may find necessary at any time; and (b) provide acceptable security which, in the judgment of the Monetary Board, would be adequate to supplement, where necessary, the assets tendered by the banking institution to collateralize the subsequent tranche. In connection with the exercise of these powers, the prohibitions in Section 128 of this Act shall not apply insofar as it refers to acceptance as collateral of shares and their acquisition as a result of foreclosure proceedings, including the exercise of voting rights pertaining to said shares:

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro Provided, however, That should the Bangko Sentral acquire any of the shares it has accepted as collateral as a result of foreclosure proceedings, the Bangko Sentral shall dispose of said shares by public bidding within one (1) year from the date of consolidation of title by the Bangko Sentral. Whenever a financial institution incurs an overdraft in its account with the Bangko Sentral, the same shall be eliminated within the period prescribed in Section 102 of this Act.” B. Appointment of Conservator Sec. 29 of the New Central Bank Act states that: “Whenever, on the basis of a report submitted by the appropriate supervising or examining department, the Monetary Board finds that a bank or a 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, the Monetary Board may appoint a conservator with such powers as the Monetary Board shall deem necessary to take charge of the assets, liabilities, and the management thereof, reorganize the management, collect all monies and debts due said institution, and exercise all powers necessary to restore its viability. The conservator shall report and be responsible to the Monetary Board and shall have the power to overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank. The conservator should be competent and knowledgeable in bank operations and management. The conservatorship shall not exceed one (1) year. The conservator shall receive remuneration to be fixed by the Monetary Board in an amount not to exceed two-thirds (2/3) of the salary of the president of the institution in one (1) year, payable in twelve (12) equal monthly payments: Provided, That, if at any time within one-year period, the conservatorship is terminated on the ground that the institution can operate on its own, the conservator shall receive the balance of the remuneration which he would have received up to the end of the year; but if the conservatorship is terminated on other grounds, the conservator shall not be entitled to such remaining balance. The Monetary Board may appoint a conservator connected with the Bangko Sentral, in which case he shall not be entitled to receive any remuneration or emolument from the

Bangko Sentral during the conservatorship. The expenses attendant to the conservatorship shall be borne by the bank or quasi-bank concerned. The Monetary Board shall terminate the conservatorship when it is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary. The conservatorship shall likewise be terminated should the Monetary Board, on the basis of the report of the conservator or of its own findings, determine that the continuance in business of the institution would involve probable loss to its depositors or creditors, in which case the provisions of Section 30 shall apply.” *Experiencing liquidity problems only. Powers of Conservator: 1. To take charge of the assets, liabilities, and the management thereof; 2. To reorganize the management of the subject bank; 3. To collect all monies and debts due said institutions; and 4. To exercise all powers necessary to restore its viability Except: Those already perfected C. Appointment of Receiver Sec. 30 of the New Central Bank Act provides that: “Whenever, upon report of the head of the supervising or examining department, 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: Provided, That this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community; (b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities; or (c) cannot continue in business without involving probable losses to its depositors or creditors; or (d) has willfully violated a cease and desist order under Section 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution; 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 Philippine Deposit Insurance Corporation as receiver of the banking institution.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro For a quasi-bank, any person of recognized competence in banking or finance may be designed as receiver. The receiver shall immediately gather and take charge of all the assets and liabilities of the institution, administer the same for the benefit of its creditors, and exercise the general powers of a receiver under the Revised Rules of Court but shall not, with the exception of administrative expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the institution: Provided, That the receiver may deposit or place the funds of the institution in non-speculative investments. The receiver shall determine as soon as possible, but not later than ninety (90) days from takeover, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public: Provided, That any determination for the resumption of business of the institution shall be subject to prior approval of the Monetary Board. If the receiver determines that the institution cannot be rehabilitated or permitted to resume business in accordance with the next preceding paragraph, 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. The receiver shall: (1) file ex parte with the proper regional trial court, and without 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 the Philippine Deposit Insurance Corporation for general application to all closed banks. In case of quasibanks, the liquidation plan shall be adopted by the Monetary Board. Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, adjudicate disputed claims against 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. The receiver shall pay the cost of the proceedings from the assets of the institution. (2) convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of

such institution in accordance with the rules on concurrence and preference of credit under the Civil Code of the Philippines and he may, in the name of the institution, and with the assistance of counsel as he may retain, institute such actions as may be necessary to collect and recover accounts and assets of, or defend any action against, the institution. The assets of an institution under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall, from the moment the institution was placed under such receivership or liquidation, be exempt from any order of garnishment, levy, attachment, or execution. The actions of the Monetary Board taken under this section or under Section 29 of this Act shall be final and executory, and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction. The petition for certiorari may only be filed by the stockholders of record representing the majority of the capital stock within ten (10) days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship. The designation of a conservator under Section 29 of this Act or the appointment of a receiver under this section shall be vested exclusively with the Monetary Board. Furthermore, the designation of a conservator is not a precondition to the designation of a receiver.” *There is a bank closure. “Close Now, Hear Later” Scheme: Sec. 29 of the New Central Bank Act states that: “Whenever, on the basis of a report submitted by the appropriate supervising or examining department, the Monetary Board finds that a bank or a 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, the Monetary Board may appoint a conservator with such powers as the Monetary Board shall deem necessary to take charge of the assets, liabilities, and the management thereof, reorganize the management, collect all monies and debts due said institution, and exercise all powers necessary to restore its viability. The conservator shall report and be responsible to the Monetary Board and shall have the power to overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank.

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro The conservator should be competent and knowledgeable in bank operations and management. The conservatorship shall not exceed one (1) year. The conservator shall receive remuneration to be fixed by the Monetary Board in an amount not to exceed two-thirds (2/3) of the salary of the president of the institution in one (1) year, payable in twelve (12) equal monthly payments: Provided, That, if at any time within one-year period, the conservatorship is terminated on the ground that the institution can operate on its own, the conservator shall receive the balance of the remuneration which he would have received up to the end of the year; but if the conservatorship is terminated on other grounds, the conservator shall not be entitled to such remaining balance. The Monetary Board may appoint a conservator connected with the Bangko Sentral, in which case he shall not be entitled to receive any remuneration or emolument from the Bangko Sentral during the conservatorship. The expenses attendant to the conservatorship shall be borne by the bank or quasi-bank concerned. The Monetary Board shall terminate the conservatorship when it is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary. The conservatorship shall likewise be terminated should the Monetary Board, on the basis of the report of the conservator or of its own findings, determine that the continuance in business of the institution would involve probable loss to its depositors or creditors, in which case the provisions of Section 30 shall apply.” *No prior hearing is necessary in appointing a receiver and in closing the bank. It is enough that subsequent judicial review is provided for. Indeed, to require such previous hearing would not only be impractical but would tend to defeat the very purpose of the law when it invested the Monetary Board with such authority. Purpose: To avoid creation of panic from the depositors or public. Reason: The government has responsibility to see to it that the person dealing with the bank is protected. Effects of receivership and liquidation: 1. Suspension of operation 2. The assets under receivership or liquidation shall be deemed in custodia legis in the hands of the receiver and shall be exempt from garnishment, levy, attachment or execution 3. Bank is not liable to pay interest on deposits during the period of suspension of operation Reason: There is no source of income 4. Banks under liquidation retain their legal personality *The bank can sue and be sued but any case should be initiated and prosecuted through the liquidator.

5. There will be no preference even if the claimant-depositor obtained a writ of preliminary attachment. Supervision of Banks: Sec. 4 of the General Banking Law states that: “The operations and activities of banks shall be subject to supervision of the Bangko Sentral. “ Supervision” shall include the following: 4.1. The issuance of rules of, conduct or the establishment standards of operation for uniform application to all institutions or functions covered, taking into consideration the distinctive character of the operations of institutions and the substantive similarities of specific functions to which such rules, modes or standards are to be applied; 4.2 The conduct of examination to determine compliance with laws and regulations if the circumstances so warrant as determined by the Monetary Board; 4.3 Overseeing to ascertain that laws and regulations are complied with; 4.4 Regular investigation which shall not be oftener than once a year from the last date of examination to determine whether an institution is conducting its business on a safe or sound basis: Provided, That the deficiencies/irregularities found by or discovered by an audit shall be immediately addressed; 4.5 Inquiring into the solvency and liquidity of the institution; or 4.6 Enforcing prompt corrective action. The Bangko Sentral shall also have supervision over the operations of and exercise regulatory powers over quasi-banks, trust entities and other financial institutions which under special laws are subject to Bangko Sentral supervision. For the purposes of this Act, “ quasi-banks” shall refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Section 95 of Republic Act No. 7653 (hereafter the “New Central Bank Act”) for purposes of relending or purchasing of receivables and other obligations.” Money Function: Sec. 50 of the New Central Bank Act states that: “The Bangko Sentral shall have the sole power and authority to issue currency, within the territory of the Philippines. No other person or entity, public or private, may put into circulation notes, coins or any other object or document which, in the opinion of the Monetary Board, might circulate as currency, nor reproduce or imitate the facsimiles of Bangko Sentral notes without prior authority from the Bangko Sentral. The Monetary Board may issue such regulations as it may deem advisable in order to prevent the circulation of foreign currency or of currency

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro substitutes as well as to prevent the reproduction of facsimiles of Bangko Sentral notes. The Bangko Sentral shall have the authority to investigate, make arrests, conduct searches and seizures in accordance with law, for the purpose of maintaining the integrity of the currency. Violation of this provision or any regulation issued by the Bangko Sentral pursuant thereto shall constitute an offense punishable by imprisonment of not less than five (5) years but not more than ten (10) years. In case the Revised Penal Code provides for a greater penalty, then that penalty shall be imposed.” Anti-Money Laundering Act: Sec. 4.1 of Republic Act 9160 states that: “Money laundering is a crime whereby the proceeds of an unlawful activity AS HEREIN DEFINED are transacted, thereby making them appear to have originated from legitimate sources. It is committed by the following: a) Any person knowing that any monetary instrument or property represents, involves, or relates to, the proceeds of any unlawful activity, transacts or attempts to transact said monetary instrument or property. b) Any person knowing that any monetary instrument or property involves the proceeds of any unlawful activity, performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in paragraph (a) above. c) Any person knowing that any monetary instrument or property is required under this Act to be disclosed and filed with the Anti-Money Laundering Council (AMLC), fails to do so.” Definitions: Covered Transaction is a transaction in cash or other equivalent monetary instrument involving total amount in excess of P500,000 within one banking day. *P500,000 is the threshold/controlling Suspicious Transaction are transactions, regardless of amount, where any of the following circumstances exists: 1. There is no underlying legal or trade obligation, purpose or economic justification; 2. The client is not properly identified; 3. The amount involved is not commensurate with the business or financial capacity of the client; 4. Taking into account all known circumstances, it may be perceived that the client’s transaction is structured in order to avoid being the subject of reporting requirements under the ACT; 5. Any circumstance relating to the transaction which is observed to deviate from the profile of the client and/or the

client’s past transactions with the covered institution; 6. The transaction is in any way related to an unlawful activity or any money laundering activity or offense under this ACT that is about to be, is being or has been committed; or 7. Any transaction that is similar, analogous or identical to any of the foregoing. Sec. 3.i. of Republic Act 9160 states that: “Unlawful activity" refers to any act or omission or series or combination thereof involving or having relation, to the following: (A) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended; (14) Kidnapping for ransom (B) Sections 4, 5, 6, 8, 9, 10, 12,13, 14, 15 and 16 of Republic Act No.9165, otherwise known as the COMPREHENSIVE Dangerous Drugs Act of 2002; (14) Importation of prohibited drugs; (15) Sale of prohibited drugs; (16) Administration of prohibited drugs; (17) Delivery of prohibited drugs (18) Distribution of prohibited drugs (19) Transportation of prohibited drugs (20) Maintenance of a Den, Dive or Resort for prohibited users (21) Manufacture of prohibited drugs (22) Possession of prohibited drugs (23) Use of prohibited drugs (24) Cultivation of plants which are sources of prohibited drugs (25) Culture of plants which are sources of prohibited drugs (C) Section 3 paragraphs b, c, e, g, h and i of Republic Act No. 3019, as amended, otherwise known as the Anti-Graft and Corrupt Practices Act; (14) Directly or indirectly requesting or receiving any gift, present, share, percentage or benefit for himself or for any other person in connection with any contract or transaction between the Government and any party, wherein the public officer in his official capacity has to intervene under the law; (15) Directly or indirectly requesting or receiving any gift, present or other pecuniary or material benefit, for himself or for another, from any person for whom the public officer, in any manner or capacity, has secured or obtained, or will secure or obtain, any government permit or license, in consideration for the help given or to be given, without prejudice to Section 13 of R.A. 3019; (16) Causing any undue injury to any party, including the government, or giving any private party any unwarranted benefits, advantage or preference in the discharge of his official, administrative or judicial functions through manifest partiality, evident bad faith or gross inexcusable negligence; (17) Entering, on behalf of the government, into any contract or transaction manifestly and

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro grossly disadvantageous to the same, whether or not the public officer profited or will profit thereby; (18) Directly or indirectly having financial or pecuniary interest in any business contract or transaction in connection with which he intervenes or takes part in his official capacity, or in which he is prohibited by the Constitution or by any law from having any interest; (19) Directly or indirectly becoming interested, for personal gain, or having material interest in any transaction or act requiring the approval of a board, panel or group of which he is a member, and which exercise of discretion in such approval, even if he votes against the same or he does not participate in the action of the board, committee, panel or group. (D) Plunder under Republic Act No. 7080, as amended; (20) Plunder through misappropriation, conversion, misuse or malversation of public funds or raids upon the public treasury; (21) Plunder by receiving, directly or indirectly, any commission, gift, share, percentage, kickbacks or any other form of pecuniary benefit from any person and/or entity in connection with any government contract or project or by reason of the office or position of the public officer concerned; (22) Plunder by the illegal or fraudulent conveyance or disposition of assets belonging to the National Government or any of its subdivisions, agencies, instrumentalities or government-owned or controlled corporations or their subsidiaries; (23) Plunder by obtaining, receiving or accepting, directly or indirectly, any shares of stock, equity or any other form of interest or participation including the promise of future employment in any business enterprise or undertaking; (24) Plunder by establishing agricultural, industrial or commercial monopolies or other combinations and/or implementation of decrees and orders intended to benefit particular persons or special interests; (25) Plunder by taking undue advantage of official position, authority, relationship, connection or influence to unjustly enrich himself or themselves at the expense and to the damage and prejudice of the Filipino people and the Republic of the Philippines (E) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised Penal Code, as amended; (26) Robbery with violence or intimidation of persons; (27) Robbery with physical injuries, committed in an uninhabited place and by a band, or with use of firearms on a street, road or alley; (28) Robbery in an uninhabited house or public building or edifice devoted to worship. (F) Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602; (29) Jueteng; (30) Masiao.

(G) Piracy on the high seas under the Revised Penal Code, as amended and Presidential Decree No. 532; (31) Piracy on the high seas; (32) Piracy in inland Philippine waters; (33) Aiding and abetting pirates and brigands. (H) Qualified theft under Article 310 of the Revised Penal Code, as amended; (34) Qualified theft. (I) Swindling 'under Article 315 of the Revised Penal Code, as amended; (35) Estafa with unfaithfulness or abuse of confidence by altering the substance, quality or quantity of anything of value which the offender shall deliver by virtue of an obligation to do so, even though such obligation be based on an immoral or illegal consideration; (36) Estafa with unfaithfulness or abuse of confidence by misappropriating or converting, to the prejudice of another, money, goods or any other personal property received by the offender in trust or on commission, or for administration, or under any other obligation involving the duty to make delivery or to return the same, even though such obligation be totally or partially guaranteed by a bond; or by denying having received such money, goods, or other property; (37) Estafa with unfaithfulness or abuse of confidence by taking undue advantage of the signature of the offended party in blank, and by writing any document above such signature in blank, to the prejudice of the offended party or any third person; (38) Estafa by using a fictitious name, or falsely pretending to possess power, influence, qualifications, property, credit, agency, business or imaginary transactions, or by means of other similar deceits; (39) Estafa by altering the quality, fineness or weight of anything pertaining to his art or business; (40) Estafa by pretending to have bribed any government employee; (41) Estafa by postdating a check, or issuing a check in payment of an obligation when the offender has no funds in the bank, or his funds deposited therein were not sufficient to cover the amount of the check; (42) Estafa by inducing another, by means of deceit, to sign any document; (43) Estafa by resorting to some fraudulent practice to ensure success in a gambling game; (44) Estafa by removing, concealing or destroying, in whole or in part, any court record, office files, document or any other papers. (J) Smuggling under Republic Act Nos. 455 and 1937; (45) Fraudulent importation of any vehicle; (46) Fraudulent exportation of any vehicle; (47) Assisting in any fraudulent importation; (48) Assisting in any fraudulent exportation; (49) Receiving smuggled article after fraudulent importation; (50) Concealing smuggled article after fraudulent importation;

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro (51) Buying smuggled article after fraudulent importation; (52) Selling smuggled article after fraudulent importation; (53) Transportation of smuggled article after fraudulent importation; (54) Fraudulent practices against customs revenue. (K) Violations under Republic Act No. 8792, otherwise known as the Electronic Commerce Act of 2000; K.1. Hacking or cracking, which refers to: (55) unauthorized access into or interference in a computer system/server or information and communication system; or (56) any access in order to corrupt, alter, steal, or destroy using a computer or other similar information and communication devices, without the knowledge and consent of the owner of the computer or information and communications system, including (57) the introduction of computer viruses and the like, resulting in the corruption, destruction, alteration, theft or loss of electronic data messages or electronic document; K.2. Piracy, which refers to: (58) the unauthorized copying, reproduction, (59) the unauthorized dissemination, distribution, (60) the unauthorized importation, (61) the unauthorized use, removal, alteration, substitution, modification, (62) the unauthorized storage, uploading, downloading, communication, making available to the public, or (63) the unauthorized broadcasting, of protected material, electronic signature or copyrighted works including legally protected sound recordings or phonograms or information material on protected works, through the use of telecommunication networks, such but not limited to, the internet, in a manner that infringes intellectual property rights; K.3. Violations of the Consumer Act or Republic Act No. 7394 and other relevant or pertinent laws through transactions covered by or using electronic data messages or electronic documents: (64) Sale of any consumer product that is not in conformity with standards under the Consumer Act; (65) Sale of any product that has been banned by a rule under the Consumer Act; , (66) Sale of any adulterated or mislabeled product using electronic documents; (67) Adulteration or misbranding of any consumer product; (68) Forging, counterfeiting or simulating any mark, stamp, tag, label or other identification device; (69) Revealing trade secrets; (70) Alteration or removal of the labeling of any drug or device held for sale; (71) Sale of any drug or device not registered in accordance with the provisions of the ECommerce Act;

(72) Sale of any drug or device by any person not licensed in accordance with the provisions of the E-Commerce Act; (73) Sale of any drug or device beyond its expiration date; (74) Introduction into commerce of any mislabeled or banned hazardous substance; (75) Alteration or removal of the labeling of a hazardous substance; (76) Deceptive sales acts and practices; (77) Unfair or unconscionable sales acts and practices; (78) Fraudulent practices relative to weights and measures; (79) False representations in advertisements as the existence of a warranty or guarantee; (80) Violation of price tag requirements; (81) Mislabeling consumer products; (82) False, deceptive or misleading advertisements; (83) Violation of required disclosures on consumer loans; (84) Other violations of the provisions of the ECommerce Act; (L) Hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended, including those perpetrated by terrorists against non-combatant persons and similar targets; (85) Hijacking; (86) Destructive arson; (87) Murder; (88) Hijacking, destructive arson or murder perpetrated by terrorists against non-combatant persons and similar targets; (M) Fraudulent practices and other violations under Republic Act No. 8799, otherwise known as the Securities Regulation Code of 2000; (89) Sale, offer or distribution of securities within the Philippines without a registration statement duly filed with and approved by the SEC; (90) Sale or offer to the public of any pre-need plan not in accordance with the rules and regulations which the SEC shall prescribe; (91) Violation of reportorial requirements imposed upon issuers of securities; (92) Manipulation of security prices by creating a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading market; (93) Manipulation of security prices by effecting, alone or with others, a series of transactions in securities that raises their prices to induce the purchase of a security, whether of the same or different class, of the same issuer or of a controlling, controlled or commonly controlled company by others; (94) Manipulation of security prices by effecting, alone or with others, series of transactions in securities that depresses their price to induce the sale of a security, whether of the same or different class, of the same issuer or of a controlling, controlled or commonly controlled company by others;

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro (95) Manipulation of security prices by effecting, alone or with others, a series of transactions in securities that creates active trading to induce such a purchase or sale though manipulative devices such as marking the close, painting the tape, squeezing the float, hype and dump, boiler room operations and such other similar devices; (96) Manipulation of security prices by circulating or disseminating' information that the price of any security listed in an Exchange will or is likely to rise or fall because of manipulative market operations of anyone or more persons conducted for the purpose of raising or depressing the price of the security for the purpose of inducing the purchase or sale of such security; (97) Manipulation of security prices by making false or misleading statements with respect to any material fact; which he knew or had reasonable ground to believe was so false and misleading, for the purpose of inducing the purchase or sale of any security listed or traded in an Exchange; (98) Manipulation of security prices by effecting, alone or with others, any series of transactions for the purchase and/or sale of any security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security, unless otherwise allowed by the Securities Regulation Code or by the rules of the SEC; (99) Sale or purchase of any security using any manipulative deceptive device or contrivance; (100) Execution of short sales or stop-loss order in connection with the purchase or sale of any security not in accordance with such rules and regulations as the SEC may prescribe as necessary and appropriate in the public interest or the protection of the investors; (101) Employment of any device, scheme or artifice to defraud in connection with the purchase and sale of any securities; (102) Obtaining money or property in connection with the purchase and sale of any security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; (103) Engaging in any act, transaction, practice or course of action in the sale and purchase of any security which operates or would operate as a fraud or deceit upon any person; (104) Insider trading; (105) Engaging in the business of buying and selling securities in the Philippines as a broker or dealer, or acting as a salesman, or an associated person of any broker or dealer without any registration from the Commission; (106) Employment by a broker or dealer of any salesman or associated person or by an issuer of any salesman, not registered with the SEC; , (107) Effecting any transaction in any security, or reporting such transaction, in an Exchange or using the facility of an Exchange which is not registered with the SEC;

(108) Making use of the facility of a clearing agency which is not registered with the SEC; (109) Violations of margin requirements; (110) Violations on the restrictions on borrowings by members, brokers and dealers; (111) Aiding and Abetting in any violations of the Securities Regulation Code; (112) Hindering, obstructing or delaying the filing of any document required under the Securities Regulation Code or the rules and regulations of the SEC; (113) Violations of any of the provisions of the implementing rules and regulations of the SEC; (114) Any other violations of any of the provisions of the Securities Regulation Code. (N) Felonies or offenses of a similar nature to the afore-mentioned unlawful activities that are punishable under the penal laws of other countries. In determining whether or not a felony or offense punishable under the penal laws of other countries, is "of a similar nature", as to constitute the same as an unlawful activity under the AMLA, the nomenclature of said felony or offense need not be identical to any of the predicate crimes listed under Rule 3.i.” Safe Harbor Provisions: Sec. 9.3.e of Republic Act 9160 states that: “No administrative, criminal or civil proceedings, shall lie against any person for having made a covered transaction report or a suspicious transaction report in the regular performance of his duties and in good faith, whether or not such reporting results in any criminal prosecution under this Act or any other Philippine law.” Truth in Lending Act: Sec. 4 of Republic Act No. 3765 states that: “Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Board, the following information: (1) the cash price or delivered price of the property or service to be acquired; (2) the amounts, if any, to be credited as down payment and/or trade-in; (3) the difference between the amounts set forth under clauses (1) and (2); (4) the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit; (5) the total amount to be financed; (6) the finance charge expressed in terms of pesos and centavos; and (7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.”

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Commercial Law Review Corporation Code Maria Zarah Villanueva - Castro *Failure to comply with the Truth in Lending Act, the contract of loan is still valid however, the bank cannot recover finance charges. Purpose: To avoid hidden charges; to know the actual amount borrowed.

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