golden notes mercantile

LETTERS OF CREDIT LETTERS OF CREDIT

Incidents in the life of a Letter of Credit (SAIS-ERR) 1. 2. 3. 4. 5.

Contract of Sale between the buyer and seller Application for L/C by the buyer with the bank Issuance of L/C by the bank Shipping of goods by the seller Execution of draft and tender of documents by the seller 6. Redemption of draft (payment) and obtaining of documents by the issuing bank 7. Reimbursement to the bank and obtaining of documents by the buyer

DEFINITION AND NATURE OF LETTER OF CREDIT Letter of Credit (L/C) It is any arrangement, however named or described, whereby a bank (issuing bank), acting at the request and on the instructions of a customer (applicant) or on its own behalf, binds itself to: (PAN) 1. Pay to the order of, or accept and pay drafts drawn by a third party (Beneficiary), or 2. Authorize another bank to pay or to accept and pay such drafts, or 3. Authorizes another bank to Negotiate, against stipulated documents

Essential conditions of a Letter of Credit 1. Issued in favor of a definite person. 2. Limited to a fixed or specified amount, or to one or more amounts, but with a maximum stated limit (Art. 568, Ibid.).

Provided, the terms and conditions of the credit are complied with (Art. 2, Uniform Customs & Practice for Documentary Credits).

NOTE: If any of these essential conditions is not present, the instrument is merely considered as a letter of recommendation.

Purpose of Letter of Credit

Q: Letters of Credit are financial devices in commercial transactions which will ensure that the seller of the goods is sure to be paid when he parts with the goods and the buyer of the goods gets control of the goods upon payment. Which statement is most accurate? (2012 Bar Question) a. The use of the Letter of Credit serves to reduce the risk of nonpayment of the purchase price in a sale transaction. b. The Letters of Credit can only be used exclusively in a sales transaction. c. The Letters of Credit are issued for the benefit of the seller only. d. (a), (b) and (c) are all correct

The purpose of a letter of credit is to ensure certainty of payment. The bank makes the commitment to pay. This addresses problems arising from seller’s refusal to part with his goods before being paid and the buyer’s refusal to part with his money before acquiring the goods, thus, facilitating commercial transactions. Laws governing Letters of Credit Letter of credit is governed by the Uniform Customs and Practice (UCP) for documentary Credits issued by the International Chamber of Commerce (Metropolitan Waterworks vs. Daway, G.R. No. 160723, July 21, 2004).

A: A. The use of the Letter of Credit serves to reduce the risk of nonpayment of the purchase price in a sale transaction

NOTE: The law on contracts and damages shall also apply to provide remedies to the party aggrieved by the breach of the main contract although such breach will not affect the obligation of the bank to pay the beneficiary or its right to obtain reimbursement from the applicant of the letter of credit if the terms of the letters of credit have been complied with.

Kinds of Letter of Credit COMMERCIAL L/C Involves the payment of money under a contract of sale. Payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement

Duration of Letters of Credit 1. Upon the period fixed by the parties; or 2. If none is fixed, one year from the date of issuance

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STANDBY L/C Involves non-sale transactions. Payable upon certification by the beneficiary of the applicant’s non-performance of the agreement. The documents that

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MERCANTILE LAW accompany the beneficiary's draft must show that the applicant has not performed the undertaking (Transfield Phils., Inc. v. Luzon Hydro Corp., G.R. No. 146717, Nov. 22, 2004).

PARTIES TO A LETTER OF CREDIT Parties to a Letter of Credit transaction 1. Applicant/Buyer/Importer/Account Party – procures the letter of credit, purchases the goods and obliges himself to reimburse the issuing bank upon receipt of the documents title. He has the right to have the marginal deposit deducted from the principal obligation under the l/c and to have the interest computed only on the balance and not on the face value thereof. Applicant has no obligation to reimburse the issuing bank if the latter pays without the stipulated documents or in case of discrepant documents, unless the applicant waives the discrepance.

Irrevocable Letter of Credit v. Confirmed Letter of Credit IRREVOCABLE L/C

CONFIRMED L/C

The issuing bank may not, without the consent of the beneficiary and the applicant, revoke its undertaking under the letter.

The correspondent bank gives an absolute assurance to the beneficiary that it will undertake the issuing bank’s obligation as its own according to the terms and condition of the credit (Prudential Bank and Trust Company v. IAC, G.R. No. 74886, Dec. 8, 1992).

2. Issuing Bank – one which, whether a paying bank

or not, Issues the letter of credit and undertakes to pay the seller upon receipt of the draft and proper documents of title from the seller and to surrender them to the buyer upon reimbursement. After due payment, issuing bank is entitled to reimbursement as a matter of right. Reimbursement includes debiting the bank account of the applicant, if any. 3. Beneficiary/Seller/Exporter – in whose favor the

instrument is executed. One who delivers the documents of title and draft to the issuing bank to recover payment. He has a prestation to do under the main contract but his failure to fulfill his obligation under the main contract does not negate his right to payment from the issuing bank as long as he is able to submit the required documents and comply with the terms of the credit, without prejudice to his liability against the account party under the law on contracts and damages.

Courts cannot order the release to the applicant of the proceeds of an Irrevocable Letter of Credit without the consent of the Beneficiary Such order violates the irrevocable nature of the L/C. The terms of an irrevocable letter of credit cannot be changed without the consent of the parties, particularly the beneficiary thereof (Phil. Virginia Tobacco Administration v. De Los Angeles, G.R. No. L-27829, Aug. 19, 1988).

NOTE: The number of parties may be increased. The following additional parties may be:

Non-payment of the buyer of its obligation under the Letter of Credit does not give the bank the right to take possession of the goods covered by the Letter of Credit

a. Advising/notifying bank – the correspondent bank (agent) of the issuing bank through which it advises the beneficiary of the L/C. b. Confirming bank – bank which, upon the request of the beneficiary, confirms the L/C issued.

The opening of a L/C does not vest ownership of the goods in the bank in the absence of a trust receipt agreement. A letter of credit is a mere financial device developed by merchants as a convenient and relatively safe mode of dealing with the sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying (Transfield Philippines, Inc. v. Luzon Hydro Corporation, G.R. No. 146717, Nov. 22, 2004).

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c. Paying bank – bank on which the drafts are to be drawn, which may be the issuing bank or another bank not in the city of the beneficiary. d. Negotiating bank – bank in the city of the beneficiary which buys or discounts the drafts contemplated by the L/C, if such draft is to be drawn on the opening bank not in the city of the beneficiary.

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LETTERS OF CREDIT An Issuing Bank is not a guarantor

RIGHTS AND OBLIGATIONS OF PARTIES

The concept of guarantee vis-a-vis the concept of irrevocable L/C is inconsistent with each other. L/Cs are primary obligations and not security contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty (MWSS v. Hon. Daway, G.R. No.160732, June 21, 2004).

Three (3) distinct but intertwined contracts in a Letter of Credit transaction 1. Between the applicant/buyer/importer/account party and the beneficiary/seller/exporter - The applicant is the one who procures the letter of credit while the beneficiary is the 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 for the goods.

NOTE: The liability of issuing bank is primary and solidary. Neither is the issuing bank entitled to the benefit of excussion.

2. Between the issuing bank and the beneficiary/seller/exporter - The issuing bank is the one that issues the letter of credit and undertakes to pay the seller upon receipt of the draft and proper documents of title. On the other hand, the beneficiary surrenders document of title to the bank in compliance with the terms of the L/C. Their relationship is governed by the terms of the L/C.

Entitlement of a bank to reimbursement Once the issuing bank shall have paid the beneficiary after the latter’s compliance with the terms of the L/C. Presentment for acceptance to the customer/applicant is not a condition sine qua non for reimbursement (Prudential Bank v. IAC, G.R. No. 74886, Dec. 8, 1992).

3. Between the issuing bank and the applicant/buyer/importer - The applicant obliges himself to reimburse the issuing bank upon receipt of the documents of title. Their relationship is governed by the terms of the application for the issuance of the L/C by the bank.

Consequence of payment upon an expired Letter of Credit An issuing bank which paid the beneficiary upon an expired L/C can recover the payment from the applicant which obtained the goods from the beneficiary to prevent unjust enrichment (Rodzssen Supply Co. v. Far East Bank and Trust Co, G.R. No. 109087, May 9, 2001).

Different roles and liabilities of the banks involved in Letter of Credit transactions KIND OF BANK Notifying/ Advising Bank

ROLE Serves as an agent of the issuing bank;

LIABILITY Does not incur any obligation more than just notifying the seller/beneficiary of the opening of the L/C after it has determined its apparent authority. (Bank of America NT & SA v. CA, G.R. No. 105395, Dec. 10, 1993)

Warrants the apparent (Appearance to unaided senses) authenticity of the L/C(Bank of America NT & SA v. CA, G.R. No. 105395, Dec. 10, 1993).

Confirming Bank

It does not guarantee the genuineness or due execution of the l/c. It is not liable for damages even if the l/c turns out to be spurious provided the spurious character is not apparent on the face of the instrument.

Lends credence to the L/C issued by a lesser-known bank.

Direct obligation, as if it is the one which issued the L/C.

The confirming bank collects fees for such engagement and obtains reimbursement from the issuing bank.

Its obligation is similar to the issuing banks. Thus, beneficiary may tender documents to the confirming bank and collect payment.

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MERCANTILE LAW Negotiating Bank

Paying Bank

Buys the seller’s draft and later on sells the draft to the issuing bank.

Depends on the stage of negotiation, thus: 1. Before negotiation – No liability with respect to the seller. Merely suggests its willingness to negotiate. 2. After negotiation – A contractual relationship will then arise, making the bank liable. As holder, it has the right to payment from the bank primarily liable on the draft (either the issuing or confirming bank). If the party primarily liable on the l/c refuses to honor the draft, the negotiating bank has the right to proceed against the drawer thereof. Direct obligation.

May either be the issuing bank or any other bank in the place of the issuing bank to facilitate payment to the beneficiary.

BASIC PRINCIPLES OF LETTER OF CREDIT

Two-Fold nature of the Independence Principle

Letters of Credit are not considered as Negotiable Instruments

1. Independence in toto where the credit is independent from the justification aspect and is a separate obligation from the underlying agreement. This principle is illustrated by standby L/C; or 2. Independence only as to the justification aspect which is identical with the same obligations under the underlying agreement. This principle is illustrated by a commercial L/C or repayment standby (Transfield v. Luzon Hydro, G.R. No. 146717, Nov. 22, 2004).

A L/C is not considered a negotiable instrument. However, drafts issued in connection with L/C’s can be considered negotiable instruments. The presumption that the drafts drawn in connection with the L/C’s have sufficient consideration applies (Lee v. CA, G.R. No. 117913, Feb. 1, 2002).

Effect of the buyer’s failure to procure a Letter of Credit to the main contract

Stay order issued by the rehabilitation court does not preclude the beneficiary from collecting on the Letter of Credit

The L/C is independent from the contract of sale. Failure of the buyer to open the L/C does not prevent the birth of the contract of sale. The opening of the LC is only a mode of payment. The LC is not an essential requisite to the contract of sale (Reliance Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R. No. 100831, Dec. 17, 1993). He will be liable for fraud of creditor.

The stay order issued by the rehabilitation court enjoining the enforcement of claims against the principal debtor, its guarantor, surety not liable solidarily with the principal debtor does not preclude the beneficiary from collecting on the letter of credit. DOCTRINE OF INDEPENDENCE

Partial payments on the loan cannot be added in computing the issuing bank’s liability under its own Standby Letter of Credit

Doctrine of Independence/ Independence Principle The relationship of the buyer and the bank is separate and distinct from the relationship of the buyer and seller in the main contract; the bank is not required to investigate if the contract underlying the L/C has been fulfilled or not because in transactions involving L/C, banks deal only with documents and not goods (BPI v. De Reny Fabric Industries, Inc., L-2481, Oct. 16, 1970). In effect, the buyer has no course of action against the issuing bank.

Although these payments could result in the reduction of the actual amount, which could ultimately be collected from the issuing bank, the latter’s separate undertaking under its letters of credit remain. The letter of credit is an absolute and primary undertaking which is separate and distinct from the contract underlying it (Insular Bank of Asia & America v. IAC, Nov. 17, 1988). In standby letter of credit securing a loan obligation, any payment of the debtor to the creditor should not be deducted from the total obligation of the issuing

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LETTERS OF CREDIT bank to the beneficiary. The issuing bank, after payment of the full amount, is entitled to full reimbursement from the debtor. But the debtor may recover excess payment from the creditor to prevent unjust enrichment.

This principle refers to fraud in relation with the independent purpose or character of the L/C and not only fraud in the performance of the obligation or contract supporting the letter of credit (Transfield v. Luzon Hydro, G.R. No. 146717, Nov. 22, 2004).

Q: AAA Carmakers opened an irrevocable Letter of Credit with BBB Banking Corporation with CCC Cars Corporation as beneficiary. The irrevocable Letter of Credit was opened to pay for the importation of ten (10) units of Mercedes Benz S class. Upon arrival of the cars, AAA Carmakers found out that the cars were all not in running condition and some parts were missing. As a consequence, AAA Carmakers instructed BBB Banking Corporation not to allow drawdown on the Letter of Credit. Is this legally possible? (2012 Bar Question) a. No, because under the "Independence Principle", conditions for the drawdown on the Letters of Credit are based only on documents, like shipping documents, and not with the condition of the goods subject of the importation. b. Yes, because the acceptance by the importer of the goods subject of importation is material for the drawdown of the Letter of Credit. c. Yes, because under the "Independence Principle", the seller or the beneficiary is always assured of prompt payment if there is no breach in the contract between the seller and the buyer. d. No, because what was opened was an irrevocable letter of credit and not a confirmed letter of credit.

Remedy for fraudulent abuse Injunction against payment is the remedy; provided the requisites enumerated immediately below this item are present. Requisites in order to enjoin the Beneficiary from drawing or collecting under the Letter of Credit on the basis of fraud (PAI) 1. 2.

3.

Clear Proof of fraud; Fraud constitutes fraudulent Abuse of the independent purpose of the letter of credit and not only fraud under the main agreement; and Irreparable Injury might follow if injunction is not granted or the recovery of damages would be seriously damaged (Ibid.) DOCTRINE OF STRICT COMPLIANCE

Doctrine of Strict Compliance The documents tendered by the seller/beneficiary must strictly conform to the terms of the L/C. The tender of documents must include all documents required by the letter. It is not a question of whether or not it is fair or equitable to require submission of documents but whether or not the documents were agreed upon. Thus, a correspondent bank which departs from what has been stipulated under the L/C acts on its own risk and may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary (Feati Bank and Trust Company v. CA, G.R. No. 940209, Apr. 30, 1991).

A: a. Under the "Independence Principle", conditions for the drawdown on the Letters of Credit are based only on documents, like shipping documents, and not with the condition of the goods subject of the importation FRAUD EXCEPTION PRINCIPLE The Exception to the Independence Principle

Doctrine of Strict Compliance v. the Independence Principle

The “Fraud Exception Principle” is the exception to the Independence Principle. It provides that the untruthfulness of a certificate accompanying a demand for payment under a standby letter of credit may qualify as fraud sufficient to support an injunction against payment.

Principle

Under the fraud exception principle, the beneficiary may be enjoined from collecting on the letter of credit if the beneficiary committed fraud by substituting fraudulent documents even if on their face the documents complied with the requirements.

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Doctrine of Strict Compliance Documents tendered by the seller or beneficiary must strictly conform to the terms of the letter of credit.

Doctrine of Independence Relationship of the buyer and the bank is separate and distinct from the relationship of the buyer and seller in the

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Consequence of the Doctrine

Payment of the Beneficiary

A correspondent bank which departs from what has been stipulated and acts on its own risk may not thereafter be able to recover. Beneficiary cannot draw on the letter of credit if he did not comply with its terms and conditions.

main contract. The bank is not required to investigate whether the contract underlying the L/C has been fulfilled or not.

of the fund, has to be strictly complied with or else funds will not be released.

Fraud Exception Principle can enjoin beneficiary from drawing or collecting under the L/C if there is fraud in relation with the independent purpose of the L/C.

Trust Receipt (TR) transaction

TRUST RECEIPTS LAW DEFINITION/CONCEPT OF A TRUST RECEIPT TRANSACTION

It is any transaction between the entruster and entrustee: 1. Whereby the entruster who owns or holds title or security interests over certain specified goods, documents or instrument (GDI), releases the same to the possession of entrustee upon the latter’s execution of a TR agreement. 2. Wherein the entrustee binds himself to hold the GDI in trust for the entruster and, in case of default, a. to sell or otherwise dispose such GDI with the obligation to turn over to the entruster the proceeds to the extent of the amount owing to it or b. to turn over the GDI itself if not sold or otherwise disposed of in accordance with the terms and conditions specified in the TR.

Q: At the instance of CCC Corporation, AAA Bank issued an irrevocable Letter of Credit in favor of BBB Corporation. The terms of the irrevocable Letter of Credit state that the beneficiary must present certain documents including a copy of the Bill of Lading of the importation for the bank to release the funds. BBB Corporation could not find the original copy of the Bill of Lading so it instead presented to the bank a xerox copy of the Bill of Lading. Would you advise the bank to allow the drawdown on the Letter of Credit? (2012 Bar Question) a. No, because the rule of strict compliance in commercial transactions involving letters of credit, requiring documents set as conditions for the release of the fund, has to be strictly complied with or else funds will not be released. b. Yes, because an irrevocable letter of credit means that the issuing bank undertakes to release the fund anytime when claimed by the beneficiary, .regardless of the kind of document presented. c. Yes, because the issuing bank can always justify to CCC Corporation that xerox copies are considered as faithful reproduction of the original copies. d. Yes, because the issuing bank really has no discretion to determine whether the documents presented by the beneficiary are sufficient or not.

Subjects of a Trust Receipt transaction (GDI) 1. Goods – shall include chattels and personal property other than: money, things in action, or things so affixed to land as to become a part thereof (Sec. 3 [d], PD 115.) Goods must be object of lawful commerce. 2. Documents – written or printed evidence of title to goods (Sec. 3 [a], PD 115). E.g. are L/C’s. 3. Instruments – negotiable instruments; certificates of stock, or bond or debenture for the payment of money issued by a corporation, or certificates of deposit, participation certificates or receipts, credit or investment instruments of a sort marketed in the ordinary course of business or finance (Sec. 3 [e], PD 115). E.g. are checks, drafts, promissory notes, bills of exchange. Parties to a Trust Receipt transaction 1. Entruster - A lender, financer or creditor. Person holding title over the GDI subject of a TR transaction; releases possession of the goods upon execution of TR (Sec. 3[c], PD 115).

A: No, because the rule of strict compliance in commercial transactions involving letters of credit, requiring documents set as conditions for the release

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2. Entrustee - A borrower, buyer, importer or debtor. He is the person to whom the goods are delivered for

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TRUST RECEIPTS LAW sale or processing in trust, with the obligation to return the proceeds of sale of the goods or the goods themselves to the entruster (Sec. 3[b], PD 115).

2.

Transactions not considered as Trust Receipt 1. A sale by a person in the business of selling for profit who retains general property rights in the GDI. 2. Where the seller retains title or other interest as security for the payment of the purchase price (Sec. 4, P.D. 115).

Security feature - property interest in the GDI to secure performance of some obligation of the entrustee or of some third persons to the entruster (Rosario Textile Mills Corp. v. Home Bankers Savings and Trust Company, G.R. No. 137232, June 29, 2005).

Effects of the dual features of a Trust Receipt 1.

NOTE: To be in the nature of trust receipt, the entruster should have financed the acquisition or importation of the goods. The funds should have been delivered before or simultaneously with delivery of the goods. If the entrustee is already the owner or in possession of the goods before delivery of the loan and execution of the trust receipt arrangement, the transaction shall be considered a simple loan even though the parties may have denominated the agreement as one of the trust receipt.

The entrustee cannot absolutely be relieved of the obligation to pay his loan just because he surrendered the goods to the entruster if the entruster refuses to accept and subsequently deposited them in the custody of the court (Sps. Vintola vs. Insular Bank of Asia and America, ibid).

2.

The entrustee cannot be relieved of his obligation to pay the loan in favor of the entruster bank in case of loss or destruction of the GDI (Rosario Textile Mills Corp. v. Home Bankers Savings and Trust Company, ibid).

Two views regarding Trust Receipt

3.

Where the proceeds of the sale are insufficient to satisfy the loan executed by the entrustee, the entruster bank can institute an action to collect the deficiency (Landl Co. v Metropolitan Bank and Trust Co. G.R. No. 159622, July 30, 2004).

4.

Repossession by the entruster of the GDI does not amount to dacion en pago. The repossession of the goods by the entrustee was merely to secure the payment of its obligation to the entrustor and not for the purpose of transferring ownership in satisfaction of the obligation (PNB vs. Pineda, G.R. No. L-46658 May 13, 1991).

1.

2.

As a commercial document - the entrustee binds himself to hold the designated GDI in trust for the entruster and to sell or otherwise dispose of GDI with the obligation to turn over to the entruster the proceeds if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the TR (Sec. 4, P.D. 115). As a commercial transaction – It is a separate and independent security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds (Nacu v. CA, G.R. No. 108638, Mar. 11, 1994).

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

Trust Receipt is not a negotiable instrument

Real owner of the articles subject of the Trust Receipt transaction

Like L/C’s, TR’s are not negotiable instruments. The presumption of consideration under the negotiable instrument law may not necessarily be applicable to trust receipts (Lee v. CA, supra).

The real owner of the articles subject of the Trust Receipt is the entrustee who binds himself to hold the designated GDI. The entruster merely holds a security interest. If under the trust receipt, the bank is made to appear as the owner, it was but an artificial expedient, more of legal fiction than fact, for if it were really so, it could dispose of the goods in any manner it wants, which it cannot do, just to give consistency with purpose of the trust receipt of giving a stronger security for the loan obtained by the importer. To consider the bank as the true owner from the inception of the transaction would be to disregard the loan feature thereof (Rosario Textile Mills Corp. v. Home Bankers Savings and Trust Company, G.R. No. 137232. June 29, 2005).

LOAN/SECURITY FEATURE Two features of a Trust Receipt transaction 1.

Loan feature - is brought about by the fact that the entruster financed the importation or purchase of the goods under TR (Sps. Vintola vs. Insular Bank of Asia and America, G.R. No. 73271, May 29, 1987).

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MERCANTILE LAW The entrustee, however, cannot mortgage the goods because one of the requisites of a valid mortgage is that the mortgagor must be the absolute owner of the property mortgaged or must have free disposal thereof. Entrustee is not the absolute owner of the goods under trust receipt nor has free disposal thereof.

OBLIGATIONS AND LIABILITY OF THE ENTRUSTEE Obligations (HR-IKRO) 1.

The entrustee is not responsible as principal or vendor under any sale or contract to sell made by the entrustee.

2.

RIGHTS OF THE ENTRUSTER

3.

1.

To be entitled to the Proceeds from the sale of the GDI to the extent of the amount owing to him.

4.

2.

To the Return of the GDI in case of non-sale and enforcement of all other rights conferred to him in the TR.

5.

3.

May Cancel the trust and take possession of the goods, upon default or failure of the entrustee to comply with any of the terms and conditions of the TR (Sec. 7, P.D. 115).

4.

6.

liabilitites

of

the

Entrustee

To Hold GDI in trust for the entruster and to dispose of them strictly in accordance with the terms of TR; To Receive the proceeds of the sale for the entruster and to turn over the same to the entruster to the extent of amount owing to the latter; To Insure GDI against loss from fire, theft, pilferage or other casualties; To Keep GDI or the proceeds thereof, whether in money or whatever form, separate and capable of identification as property of the entruster; To Return GDI to the entruster in case they could not be sold or upon demand of the entruster; and To Observe all other conditions of the TR (Sec. 9, P.D. 115).

NOTE: Not all obligations of the entrustee are criminal in nature. The gravamen of the criminal offense under the trust receipts law is the failure of the entrustee to deliver the proceeds of the sale to the entruster up to the extent of the entrutee's obligations or the return of the same in case of non-sale.

To Sell the goods with at least five day notice to the entrustee and apply the proceeds in payment of the obligation. Entrustee liable to pay deficiency, if any.

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

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

Disposition of the proceeds of the sale of the goods, documents or instruments

Entruster has a better right over the goods than that of the creditors of the entrustee

The proceeds of the sale of GDI shall be applied in the following (SDP): 1. Expenses of the Sale; 2. Expenses Derived from re-taking, keeping and storing the GDI; and 3. Principal obligation (Sec. 7, PD 115).

The entruster’s security interest in goods, documents, or instruments pursuant to the written terms of a TR shall be valid as against all creditors of the entrustee for the duration of the TR agreement (Sec. 12, P.D. 115).

NOTE: Full payment of the loan or delivery of the sale proceeds equivalent to the full amount of the obligation extinguishes both criminal and civil liabilities of the entrustee. In case of deficiency, the entrustee shall be liable thereon. However, any excess shall belong to him.

The security interest of the entruster over the goods under the trust receipt is superior than the monetary claims of the laborers of the entrustee. Purchaser in good faith can defeat the rights of the entruster over the goods A purchaser in good faith acquires the goods, documents or instruments free from the entruster's security interest (Sec. 11, P.D. 115).

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and

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TRUST RECEIPTS LAW RETURN OF GOODS, DOCUMENTS OR INSTRUMENTS IN CASE OF NON-SALE

PENAL SANCTION IF OFFENDER IS A CORPORATION Elements to be established in order to validly prosecute the Entrustee for Estafa

Obligation of the Entrustee in case the goods, documents or instruments were not sold

In order that the entrustee may be validly prosecuted for estafa under Art. 315, paragraph 1(b) of the RPC, in relation with Sec. 13 of PD 115, the following elements must be established (R-MAD): 1. The entrustee Received the subject goods in trust or under the obligation to sell the same and to remit the proceeds thereof to the entruster, or to return the goods if not sold; 2. The entrustee Misappropriated or converted the goods and/or the proceeds of the sale; 3. The entrustee performed such acts with Abuse of confidence to the damage and prejudice of entruster; and 4. A Demand was made on the entrustee by entruster for the remittance of the proceeds or the return of the unsold goods (Land Bank of the Philippines vs. Perez, GR No. 166884, June 13, 2012).

The entrustee should return the GDI to the entruster (Sec. 4, P.D. 115). The return of the goods, documents or instruments in case of non-sale extinguishes only the criminal liability of the entrustee unless he pays in full his loan obligation. The consequent acquittal of the entrustee in the criminal case does not bar the filing of a separate civil action to enforce the civil liability of the entrustee. The failure to turn over goods or proceeds realized from the sale thereof is a criminal offense under Art. 315(l)(b) of RPC (estafa) except if he disposed of the goods in accordance with the terms.

LIABILITY FOR LOSS OF GOODS, DOCUMENTS OR INSTRUMENTS

NOTE: If proof as regards the delivery of GDI to the accused (entrustee) is insufficient, estafa cannot lie (Ramos v. CA, G.R. No. L-3992-25, Aug. 21, 1987).

Entrustee shall bear the loss of the goods, documents, or instruments which are the subject of a Trust Receipt

Compliance with the obligation under the Trust Receipt agreement vis-a-vis criminal liability

Loss of the GDI which is the subject of a TR, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof (Sec. 10, P.D. 115).

1. 2.

Principle of Res Perit Domino is not a valid defense against an Entrustee in cases of loss or destruction of the goods, documents, or instruments secured by a Trust Receipt

If compliance occurred before the criminal charge- there is no criminal liability. If compliance occurred after the charge even before conviction- the criminal action will not be extinguished.

P.D. 115 does not violate the prohibition in the Constitution against imprisonment for non-payment of a debt

For the principle of res perit domino to apply the entrustee must be the owner of the goods at the time of the loss. A trust receipt is a security agreement, pursuant to which a bank acquires a ‘security interest’ in the goods. It secures an indebtedness and there can be no such thing as security interest that secures no obligation. If under a trust receipt transaction, the entruster is made to appear as the owner, it was but an artificial expedient, more of legal fiction than fact, for if it were really so, it could dispose of the goods in any manner it wants. Thus, the ownership of the goods remaining with the entrustee, he cannot be relieved of the obligation to pay his/her loan in case of loss or destruction (Rosario Textile Mills vs. Home Bankers Association, supra).

What is being punished is the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether the latter is the owner or not. It does not seek to enforce payment of the loan. Thus, there can be no violation of a right against imprisonment for non-payment of a debt (People v. Nitafan, G.R. No. 81559, Apr 6, 1992). Q: Is lack of intent to defraud a bar to the prosecution of these acts or omissions? (2006 Bar Question) A: No. The mere failure to account or return gives rise to the crime which is malum prohibitum. There is no requirement to prove intent to defraud (Ching v. Secretary of Justice, G.R. No. 164317, Feb. 6, 2006).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Penal sanction is not available if the goods are not intended for sale or resale

rshall be charged and penalized for the crime, precisely because of the nature of the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime punishable by imprisonment (Ching vs. Secretary of Justice, GR No. 164317, Feb. 6, 2006).

To be a TR transaction, the goods must be intended for sale or resale. In Ng v. People, the Supreme Court held that the trial court erred in ruling that the agreement in the case was a TR transaction because the goods involved were intended to be used in the fabrication of steel communication towers.

Rationale behind the accountability of the officers of the corporation The rationale is that such officers or employees are vested with the authority and responsibility to devise means necessary to ensure compliance with the law and, if they fail to do so, are held criminally accountable; thus, they have a responsible share in the violations of the law (ibid).

The Court further ruled that, “[T]he true nature of a trust receipt transaction can be found in the ‘whereas’ clause of PD 115 which states that a trust receipt is to be utilized ‘as a convenient business device to assist importers and merchants solve their financing problems.’ Obviously, the State, in enacting the law, sought to find a way to assist importers and merchants in their financing in order to encourage commerce in the Philippines.”

NOTE: An officer of a corporation who signed a TR cannot hide behind the cloak of the separate corporate personality of the corporation, where “he is the actual, present and efficient actor.” Corporate officers or employees, through whose act, default or omission the corporation commits a crime, are themselves individually guilty of the crime. The principle applies whether or not the crime requires the consciousness of wrongdoing (Ching vs. Secretary of Justice, supra).

The principle is of course not limited in its application to financing importations, since the principle is equally applicable to domestic transactions. Regardless of whether the transaction is foreign or domestic, it is important to note that the transactions discussed in relation to trust receipts mainly involved sales (G.R. No. 173905, April 23, 2010).

REMEDIES AVAILABLE Defenses available to negate CRIMINAL liability of the Entrustee (CoCo CaCo No LP)

In another case, Land Bank of the Philippines v. Perez, it was held that when both parties enter into an agreement knowing that the return of the goods subject of the trust receipt is not possible even without any fault on the part of the entrustee, it is not a trust receipt transaction penalized under Section 13 of P.D. 115; the only obligation actually agreed upon by the parties would be the return of the proceeds of the sale transaction. The transaction becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the purchase of the goods.

1.

2. 3.

NOTE: Repossession of the goods will extinguish only the criminal liability.

4.

Penal sanction when the offender is a corporation Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees or other officers or persons responsible for the offense, without prejudice to the civil liabilities of such corporation and/or board of directors, officers, or other officials or employees responsible for the offense.

5.

6. 7.

If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other officers thereof responsible for the offense UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Compliance with the terms of the TR either by payment, return of the proceeds or return of the goods (Sec. 13, PD 115.) Consignment. Cancellation of the TR agreement and taking into possession of the goods by the entruster.

10

Compromise by parties before filing of information in court. Compromise of estafa case arising from TR transaction, after the case has been filed in court does not amount to novation and does not erase the criminal liability of the accused (Ong v. CA, 124 SCRA 578 [1983]). Non-receipt of the goods by the entrustee or where proof of delivery of goods to the accused is insufficient. (Ramos v. CA, G.R. No. L-3992-25, Aug. 21, 1987). Loss of goods without fault of the entrustee. The transaction does not fall under PD 115 (Colinares v. CA, G.R. No. 90828, Sept. 5, 2000, Consolidated v. CA, G.R. No. 114286, Apr. 19, 2001).

TRUST RECEIPTS LAW NOTE: In these cases, the execution of a TR was made after the goods covered by it had been purchased, making the buyer the owner thereof. The transaction does not involve a TR but a simple loan even though the parties denominate the transaction as one of a TR.

the subsequent importation. Is there sufficient basis to sue for criminal action? (2012 Bar Question) a. Yes, because X's failure to turn over the proceeds to the bank is a violation of the Trust Receipt Law. b. No, because the trust receipt was signed only after the delivery of the goods. When the trust receipt was signed, the ownership of the goods was already with X. c. Yes, because violation of Trust Receipt Law is mala prohibita, intention is irrelevant. d. No, because X has a valid reason not to deliver the proceeds to BBB Banking Corporation.

Failure of the entrustee to deliver the proceeds of sale will give the entruster the right to file a civil action and a criminal action for estafa The civil action may be instituted in the criminal action or separately filed independently of the criminal action. The criminal action is based on ex-delictu for violation of the law while the civil action is based on ex-contractu for violation of the trust receipt arrangement.

A: B. When the trust receipt was signed, the ownership of the goods was already with X.

Repossession of the goods by the Entruster cannot be considered as payment

Q. Dennis failed to comply with his undertaking under the TR he issued in favor of ABC bank. The bank filed both criminal and civil cases against Dennis. The court proceeded with the civil case independently from the criminal case. Is the court correct in proceeding independently although a criminal case is also instituted?

Payment would legally result only after the entruster has foreclosed on the securities, sold the same and applied the proceeds thereof to the entrustee’s obligation. Since the TR is a mere security arrangement, the repossession by the entruster cannot be considered payment of the loan/advances given to the entrustee under the letter of credit/trust receipt (PNB v. Pineda, G.R. No. 46658, May 13, 1991).

A: Yes, the complaint against Dennis is based on the failure of the latter to comply with his obligation as spelled out in the TR. This breach of obligation is separate and distinct from any criminal liability for "misuse and/or misappropriation of goods or proceeds realized from the sale of goods, documents or instruments released under trust receipts", punishable under Sec. 13 of the PD 115. Being based on an obligation ex contractu and not ex delicto, the civil action may proceed independently of the criminal proceedings instituted against petitioners regardless of the result of the latter (Sarmiento vs. CA, G.R. No. 122502, Dec. 27, 2002).

In the event of default by the Entrustee on his obligation under the Trust Receipt agreement, it is NOT absolutely necessary for the Entruster to cancel the trust and take possession of the goods to be able to enforce his right thereunder The law uses the word "may" in granting to the entruster the right to cancel the trust and take possession of the goods. Consequently, the entrustee has the discretion to avail of such right or seek any alternative action, such as a third party claim or a separate civil action which it deems best to protect its right, at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust agreement (South City Homes, Inc. v. BA Finance Corporation, G.R. No. 135462, Dec. 7, 2001).

Effect of novation of a Trust Agreement Where the entruster and entrustee entered into an agreement which provides for conditions incompatible with the TR agreement, the obligation under the trust receipt is extinguished. Hence, the breach in the subsequent agreement does not give rise to a criminal liability under P.D. 115 but only civil liability (Philippine Bank v. Ong, G.R. No. 133176, Aug. 8, 2002).

Q: BBB Banking Corporation issued a Letter of Credit in the amount of P5Million, for the purchase of five (5) tons of corn by X. Upon arrival of the goods, the goods were delivered to the warehouse of X. Thereafter he was asked to sign a Trust Receipt covering the goods. When the goods were sold, X did not deliver the proceeds to BBB Banking Corporation, arguing that he will need the fund for

11

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Deposits in a savings account opened by the buyer subsequent to the Trust Receipt transaction cannot be automatically applied to outstanding obligations under the Trust Receipt account

Warehouseman (WHM)

The receipt of the bank of a sum of money without reference to the TR obligation does not obligate the bank to apply the money received against the trust receipt obligation. Neither does compensation arise because compensation is not proper when one of the debts consists in civil liability arising from criminal (Metropolitan Bank and Trust Co. v. Tonda, G.R. No. 134436, Aug. 16, 2000).

Warehouse (WH)

Q: E received goods from T for display and sale in E's store. E was to turn over to T the proceeds of any sale and return the ones unsold. To document their agreement, E executed a trust receipt in T’s favor covering the goods. When E failed to turn over the proceeds from his sale of the goods or return the ones unsold despite demand, he was charged in court for estafa. E moved to dismiss on the ground that his liability is only civil. Is he correct? (2011 Bar Question)

2.

A person, natural or juridical, lawfully engaged in the business of storing of goods for profit (Sec. 58, WRL).

The building or place where goods are deposited and stored for profit. Persons who may issue a Warehouse Receipt 1.

Form and essential terms of a Warehouse Receipt It need not be in particular form but must embody within its written or printed terms (LCD-DSWD-LF): 1. 2. 3. 4.

A: No, since his breach of the trust receipt agreement subjects him to both civil and criminal liability for estafa.

5. 6.

WAREHOUSE RECEIPTS (WHR) LAW (ACT 2137, AS AMENDED)

7. 8.

Warehouse Receipt (WHR) It is a written acknowledgment by the warehouseman that he has received and holds certain goods therein described in his warehouse for the person to whom the document is issued. The warehouse receipt has two-fold functions, that is, it is a contract and a receipt (Telengtan Bros. & Sons v. CA, G.R. No. L-110581, Sept 21, 1994).

9.

Warehouse receipt law v. Documents of title under the Civil Code

3. 4.

WAREHOUSE RECEIPTS LAW Warehouse receipts issued by warehouses, whether public or private, bonded or not.

Location of the WH Consecutive number of the receipt Date of the issue A statement whether the goods received will be Delivered to bearer, to a specified person or to a specified person or his order Signature of the WHM If the receipt is issued for goods of which the Warehouseman is the owner, either solely or jointly or in common with others, the fact of such ownership; and Description of the goods A statement of the amount of advances made and of liabilities incurred for which the warehouseman claims a Lien. Fees (Sec. 2, WH Law).

Effects of omission of any of the essential terms (CIV-N) 1. 2.

DOCUMENTS OF TITLE UNDER CIVIL CODE Other receipts of documents issued in bailment contracts other than warehouse receipts (Art.1507-1520 NCC)

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

WHM, whether public or private, bonded or not (Sec. 1, WHR Law). A person authorized by a WHM.

Conversion of the contract to ordinary deposit. Injured person can hold WHM liable for all damages caused by the omission Validity of receipt not affected Negotiability of receipts not affected (Gonzales v. Go Fiong & Luzon Surety Co., G.R. No. 91776, Aug. 30, 1958).

Prohibited terms in a Warehouse Receipt A warehouseman may insert in a receipt issued by him, any other terms and conditions provided that such terms and conditions shall not be (C2-RMN): 1. Contrary to the Warehouse Receipts Law (Sec. 3).

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WAREHOUSE RECEIPTS LAW 2. 3. 4.

5.

Contrary to law, morals, good customs, public order or public policy. Terms Reducing the required diligence of the warehouseman (Ibid) Those exempting the warehouseman from liability for Misdelivery or for not giving statutory notice in case of sale of goods. Those exempting the warehouseman from liability for Negligence.

1. The owner 2. Any person to whom the possession or custody of the receipt has been entrusted by the owner, if, by the terms of the receipt, the goods are deliverable to the order of the person to whom the possession or custody of receipt has been entrusted or in such form that it may be negotiated by delivery (Sec. 40, WHR Law). Effect when a Negotiable Warehouse Receipt was delivered without the necessary indorsement (AC DC)

Effect when the goods deposited are incorrectly described GR: Warehouseman shall be liable for damages for non-existence or misdescription of goods at the time of its issue.

1. The transferee ACquires title against the transferor 2. There is no Direct obligation of the WHM; and 3. The transferee can Compel the transferor to complete the negotiation by indorsing the instrument. Negotiation takes effect as of the time when the indorsement is actually made.

XPN: When the goods are described based on: 1. Series or labels upon them 2. Statement that the goods are of certain kind.

Rights of the owner of the Negotiable Warehouse Receipt in case the signature of an owner was forged and the forger was able to withdraw the goods from the Warehouseman

Person to whom the goods should be delivered (PDO) 1. To the person lawfully entitled to the Possession of the goods, or his agent; 2. To the person entitled to Delivery under a non-negotiable instrument or with written authority; or 3. To the lawful Order of a negotiable receipt (person in possession of a negotiable receipt) (Sec. 9, WHR Law).

1. If under WHR, the goods are deliverable to the depositor or to his order, the owner of the said negotiable receipt may proceed against the WHM and/or the holder. 2. Without the valid indorsement of the owner to the holder or in blank, the WHM is liable to the owner for conversion in the misdelivery. 3. If the goods are deliverable to bearer, the owner may only proceed against the holder. The WHM is not liable for conversion where the goods are delivered to a person in possession of a bearer negotiable instrument.

,

KINDS Kinds of Warehouse Receipt 1. Negotiable warehouse receipt 2. Non-negotiable warehouse receipt

Duplicate receipts must be so marked in case one negotiable receipt is issued for the same goods

Negotiable WHR

A WHM shall be liable for all damages caused by his failure to do so to anyone who purchased the subsequent receipt for value supposing it to be an original, even though the purchase be after the delivery of the goods by the WHM to the holder of the original receipt (Sec. 6, WHR Law).

It is a receipt in which it states that the goods received will be delivered to the bearer or to the order of any person named in such receipt (Sec. 5, WHR Law). It is negotiated by delivery or indorsement plus delivery. NOTE: No provision shall be inserted in a negotiable receipt that it is non-negotiable. Such provision, if inserted, shall be void, and the receipt shall remain negotiable. A negotiable warehouse receipt cannot be converted into non-negotiable (Sec. 5, WHR Law).

NOTE: The word “duplicate” shall be plainly placed upon the face of every such receipt, except the first one issued (ibid.).

Person who may negotiate a Negotiable Warehouse Receipt

It is a receipt in which it is stated that the goods received will be delivered to the depositor or to any other specified person (Sec. 4, WHR Law).

Non-Negotiable Warehouse Receipt

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW NOTE: To make it non-negotiable, it is needed to be indicated in the face of the WHR by the warehouseman issuing it that the same is “non-negotiable,” or “not negotiable” (Sec.7, WHR Law).

DISTINCTION BETWEEN A NEGOTIABLE INSTRUMENT AND A NEGOTIABLE WAREHOUSE RECEIPT Negotiable Instrument v. Negotiable Warehouse Receipt

Effect of failure to place an indication of non-negotiability in the WHR

NEGOTIABLE INSTRUMENT

Failure to mark the WR as “non-negotiable” shall entitle the holder, who purchased it for value supposing it to be negotiable, to treat such receipt negotiable (ibid).

Contains an unconditional promise to pay a sum certain in money.

Transfer of a Non-Negotiable Warehouse Receipt The subject is money. A non-negotiable warehouse receipt may be transferred by its delivery to the transferee accompanied by a deed of assignment, donation or other form of transfer. Effect of indorsement of a Non-Negotiable Warehouse Receipt

The negotiable instrument is the object of value. Intermediate parties become secondarily liable.

Even if the receipt is indorsed, the transferee acquires no additional right (Sec. 39, WHR Law). Warranties on a Warehouse Receipt 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 (GRIT) : 1. Receipt is Genuine 2. Legal Right to negotiate or transfer it 3. No knowledge of defects that may Impair the validity or worth of the receipt 4. That he has a right to Transfer title to the goods and that the goods are merchantable or fit for a particular purpose whenever such warranties would have been to transfer without a receipt of goods represented thereby (Sec. 44, WHR Law).

The general endorsers warrant that the instrument after due presentment shall be paid and in case of dishonor and notice of dishonor given, the endorser shall pay the holder.

NOTE: The indorsee does not guarantee that the WHM will comply with his duties (Sec. 45, WHR Law).

When no warranty implied

Does not contain an unconditional promise to pay a sum certain in money. The obligation is to deliver goods. The subject is merchandise. The warehouse receipt is not the object of value. Intermediate parties are not liable for the warehouse man’s failure to deliver the goods. Although endorsers or intermediate parties are not liable for any failure on the part of the warehouseman or previous endorsers of the receipt to fulfill their obligations they may be held liable for breach of warranties such as: (1) receipt is genuine and in respect what it purports to be (2) they have legal title to the instrument (3) goods are fit for consumption and merchantable (4) they are not aware of any information that will make the instrument worthless

Rights of a holder of a Negotiable Warehouse Receipt v. the Rights of a transferee of a Non-Negotiable Warehouse Receipt

A mortgagee, pledgee, or holder for security of a receipt who, in good faith, demands or receives payment of the debt for which such receipt is security, whether from a party to a draft drawn for such debt or from any other person, shall not, by so doing, be deemed to represent or to warrant the genuineness of such receipt or the quantity or quality of the goods therein described. In short, a creditor receiving the WHR given as collateral makes no warranty (Sec. 46, WHR Law). UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

NEGOTIABLE WHR

NEGOTIABLE WAREHOUSE RECEIPT May be acquired through negotiation Rights of the holder of the receipt: 1. If indorsed:

14

NON-NEGOTIABLE WAREHOUSE RECEIPT May be acquired through transfer or assignment Rights of transferee: 1. Acquires title to the goods subject to the

WAREHOUSE RECEIPTS LAW a. Acquires title to the goods as the person negotiating (Sec. 41, WHR Law). b. Acquires the direct obligation of the warehouseman to hold possession of the goods for him as if the warehouseman directly contracted with him (ibid). 2. If not indorsed: He may compel indorsement; other-wise, he would acquire title as that of an assignee (Sec. 43, WHR Law.).

Defeats the lien of the seller of the goods covered thereby (Sec. 49, WHR Law). Good covered cannot be garnished, attached or levied on execution by unless: 1. Receipt is surrendered. 2. Its negotiation is enjoined by the court. 3. The goods are impounded by the court (Sec. 25, WHR Law). NOTE: This shall not apply if the person depositing is not the owner of the goods or one who has no right to convey title to the goods binding upon the owner.

terms of any agreement with the transferor (Sec. 42, WHR Law). 2. Acquires the right to notify the warehouseman of the transfer and thereby acquires the direct obligation of the warehouseman to hold possession of the goods for him (ibid).

The same is true provided that 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 (Sec. 47, WHR Law).

NOTE: Prior to notice, the title of the transferee 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. (ibid.)

A: The goods cannot, while in the possession of the WHM, be attached by garnishment or otherwise, or be levied upon under an execution unless the receipt be first surrendered to the WHM, or its negotiation enjoined. The warehouseman cannot be compelled to deliver the actual possession of the goods until the receipt is surrendered to it or impounded by the court.

Q: Coco was issued by a Warehouseman a negotiable receipt for safekeeping by the latter of his goods. Can the judgment creditor of Coco levy by execution the goods covered by the negotiable receipt?

Q: Assuming that prior to the levy, the receipt was sold to Yoyo on the basis of which he filed a claim with the sheriff. Would Yoyo have better rights to the goods than the creditor? Explain your answer. (1999 Bar Question)

Acquires the title as that of his transferor.

A: Yes. Yoyo, as a holder for value of the receipt, has a better right to the goods than the creditor. It is Yoyo that can surrender the receipt which is in its possession and can comply with the other requirements which will oblige the warehouseman to deliver the goods, namely, to sign a receipt for the delivery of the goods, and to pay the warehouseman's liens and fees and other charges.

Pending notification to the warehouseman, goods can be garnished, attached or levied on execution Reason: Absent such notice, both the warehouseman and the sheriff have a right to assume that the goods are still owned by the person whose name appears in the receipt.

Q: What is the proper recourse of the warehouseman if he is uncertain as to who is entitled to the goods? Explain. (2005 Bar Question) A: Since there is a conflicting claim of ownership or title, the warehouseman should file a complaint in interpleader requiring the claimants to interplead. The matter involves a judicial question as to whose claim is valid.

The assignee only steps into the shoes of the assignor.

Rule where a warehouse receipt is transferred to secure payment of a loan by way of pledge or mortgage

Breach of duty on the part of the person making the negotiation or fraud, mistake or duress on the owner of the receipt to entrust possession or custody DOES NOT impair the validity of negotiation of a Warehouse Receipt

The pledgee or mortgagee does not automatically become the owner of the goods but merely retains the right to keep, and with the consent of the owner to sell them so as to satisfy the obligation from the proceeds for the simple reason that the transaction is not a sale but only a mortgage or pledge. Likewise, if

Protects the purchaser in good faith and for value.

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW the property is lost without the fault or negligence of the mortgagee or pledgee, then said goods are to be regarded as lost on account of the real owner, mortgagor or pledgor (PNB v. Sayo, Jr., G.R. No. 129198, July 9, 1998). Non-payment by the original depositors of the purchase price will NOT render the further negotiation of the receipt invalid The negotiation of the warehouse receipt by the buyer of goods purchased from and deposited to the warehouseman is valid even if the warehouseman who issued the negotiable warehouse receipt was not paid by the buyer. The validity of the negotiation cannot be impaired by the fact that the owner/warehouseman was deprived of the possession of the same by fraud, mistake or conversion (PNB v. Noah’s Ark Sugar Refinery, G.R. No. 107243, Sept. 1, 1993).

3.

Instance when the need for a demand by the depositor is not necessary A demand by the depositor is not necessary when the warehouseman has rendered it beyond his power to deliver the goods.

Q: T delivers two refrigerators to the warehouse of W who then issues a negotiable receipt undertaking the delivery of the refrigerators to “T or bearer.” T entrusted the receipt to B for safekeeping only. B negotiated it, however, to F who bought it in good faith and for value. Who is entitled to the delivery of the refrigerators? (2011 Bar Question)

Justified refusal to deliver by the warehouseman (Sa S.B. Co(nfa) F(elvis)) 1.

If the warehouseman’s lien is not SAtisfied by the claimants (Sec. 31, WHR Law). 2. Where the goods have already been Sold to satisfy the warehouseman’s lien or because of their perishable or hazardous nature (Sec. 34, WHR Law). 3. If the warehouse receipt is negotiated Back to him. 4. When the holder does not satisfy the COnditions prescribed in Sec. 8, WHR Law: a. Non-satisfaction of warehouseman’s lien. b. Failure to surrender warehouse receipt. c. Refusal to sign the Acknowledgement receipt, acknowledging the receipt of the goods from the warehouse. 5. The failure was not due to any Fault on the part of the warehouseman: a. Upon request by or on behalf of the person lawfully Entitled (Sec. 10, WHR Law). b. If the goods are Lost, due to a fortuitous event exclusively. c. If the warehouseman needs reasonable time to ascertain the Validity of the claim if someone other than the depositor claims title to the goods (Sec. 18, WHR Law). d. If he had Information that the delivery about to be made was to one not lawfully entitled (Sec. 10, WHR Law) e. If Several persons claim the goods (Sec. 17, WHR Law.)

A: F, since he is a purchaser in good faith and for value. Between the real owner of the goods and an innocent purchaser for value acquiring the Warehouse Receipt from a thief, the former prevails If the goods were stolen from the owner and deposited to the warehouseman who subsequently issued a warehouse receipt which in turn was duly negotiated to an innocent purchaser for value, the owner has the better right than the holder of the negotiable warehouse receipt. This is because a thief transfers no title. DUTIES OF A WAREHOUSEMAN Obligations of a warehouseman (TD(sasusi) K) 1.

2.

Take care of the goods entrusted to his safekeeping with the same care as a reasonably careful owner of similar goods would exercise. Deliver them to the holder of the receipt or the depositor provided there is demand by the depositor accompanied by either: a. An offer to satisfy the warehouseman’s lien

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

b. An offer to surrender the receipt, if negotiable with such indorsements as would be necessary for the negotiation of the receipts c. A readiness and willingness to sign, when the goods are delivered, an acknowledgment that they have been delivered, if such signature is requested by the warehouseman (Sec. 8, WHR Law). Keep the goods separate from the goods of other depositors, except if authorized by agreement or by custom, fungible goods may be mingled with other goods of the same kind and grade.

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WAREHOUSE RECEIPTS LAW Q: The warehouseman, by issuing the warehouse receipt, acknowledges that the goods are in his possession, but he can refuse to deliver the goods to the holder of the warehouse receipt covering the goods if - (2012 Bar Question)

negotiated for value without notice of the proceedings or of the delivery of the goods (ibid.).

a. the warehouse receipt covering the goods is not presented. b. the lien of the warehouseman is not satisfied. c. the said holder presents a materially altered warehouse receipt. d. All of the above.

1.

A: D. A WHM is bound to deliver the goods upon a demand made if such is accompanied with (1) an offer to satisfy the WHM’s lien; (2) offer to surrender the receipt if negotiable; and (3) readiness to sign an acknowledgment receipt when the goods are delivered (Sec. 8, WHR Law).

Conversion

Instances when the duty to insure the goods arise (RIEL)

2. 3. 4.

Where the warehouse receipt contains a Representation to that effect. Where it was an Inducement for the depositor to enter into the contract; Established practice; or Where the Law provides

It is an unauthorized assumption and exercise of the right of ownership over goods belonging to another through the alteration of their condition or the exclusion of the owner’s right (Bouvier’s Law Dictionary).

HOWEVER, Sec. 31 of the said Law expressly provides that a WHM having a lien valid against the person demanding the goods may refuse to deliver the goods to him until the lien is satisfied.

Instances where a Warehouseman is liable for conversion 1.

Further, Sec. 13 provided that the alteration of a receipt shall not excuse the WHM who issued it from any liability if such alteration was: (1) immaterial, (2) authorized, or (3) made without fraudulent intent.

2.

Warehouseman has no cause of action for repossession and damages on the basis of a falsified delivery permit

Where the delivery is made to person other than those authorized Even if delivered to persons entitled, he may still be liable for conversion if prior to delivery: a. He had been requested not to make such delivery; or b. He had received notice of the adverse claim or title of a third person.

Effects of alteration of the receipt on the liability of the warehouseman

Warehouseman has no cause of action against the person to whom it delivered deposited articles where the real parties interested in the questioned articles have not yet sued the warehouseman for damages on account of wrongful delivery (Consolidated Terminals Inc. vs. Artex Development Co. Inc. G.R. No. L-25748 March 10, 1975).

1. Alteration immaterial – whether fraudulent or not, whether authorized or not, the warehouseman is liable on the altered receipt according to its original tenor 2. Authorized material alteration warehouseman is liable according terms of the receipt as altered

Remedy if the Warehouse Receipt is lost or destroyed

– to

the the

3. Material alteration innocently made – the warehouseman is liable on the altered receipt according to its original receipt

A court of competent jurisdiction may order the delivery of the goods only: a. Upon satisfactory proof of the loss or destruction of the receipt; and b. Upon the giving of a bond with sufficient sureties to be approved by the court (Sec. 14, WHR Law).

4. Material alteration fraudulently made – warehouseman is liable according to the original tenor of the receipt to a purchaser of the receipt for value without notice, and even to the alterer and subsequent purchasers with notice except that as regards to the last two, the warehouseman’s liability is limited only to delivery as he is excused from any liability

NOTE: The delivery of the goods under an order of the court shall NOT relieve the WHM from liability to a person to whom the negotiable receipt has been or shall be

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Instances where a Warehouse man is criminally liable for his acts (GF-DOOM-C)

Remedies available to a Warehouseman to enforce his Warehouseman’s lien (REC)

1.

1.

2. 3. 4.

5. 6. 7.

Issuance of warehouse receipts for Good not received (Sec. 50, WHR Law). Issuance of receipt containing False statement (Sec. 51, WHR Law). Issuance of Duplicate negotiable warehouse receipt not marked as such (Sec. 52, WHR Law). Issuance of a negotiable warehouse receipt of which he is an Owner without stating such fact of ownership (Sec. 53, WHR Law). Delivery of goods without Obtaining negotiable warehouse receipt (Sec. 54, WHR Law). Negotiation of receipt for Mortgaged goods (Sec. 55, WHR Law). Commingling of goods (Sec. 24, WHR Law).

2. 3.

Lien over the goods does not preclude the WHM to avail all other remedies

Other acts for which Warehouse Man is liable (DuMP-SICC) 1. 2. 3.

4.

5. 6. 7.

Whether a warehouseman has or has not a lien upon the goods, he is entitled to all remedies allowed by law to a creditor against a debtor for the collection from the depositor of all charges and advances which the depositor has expressly or impliedly contracted with the warehouseman to pay (Sec 32, WHR Law).

Failure to stamp “Duplicate” on copies of negotiable receipt (Sec.6, WHR Law). Misdelivery of goods (Sec. 10, WHR Law). Failure to Place “non-negotiable” or “not-negotiable” on a non-negotiable receipt (Sec. 7, WHR Law). Failure to give notice in case of Sale of goods to satisfy lien (Sec. 33, WHR Law) or because the goods are perishable or hazardous (Sec. 34, WHR Law). Issuing receipt for non-existing goods or misdescribed goods (Sec.20, WHR Law). Failure to take Care of the goods (Sec. 21, WHR Law). Failure to effect Cancellation of a negotiable receipt upon delivery of the goods (Sec. 11, WHR Law).

Enforcement of a Lien The lien may be enforced against the goods of the following: 1. Goods belonging to the person who is liable as debtor; and 2. Goods belonging to others which have been deposited at any time by the debtor with authority to make a valid pledge (Sec. 28, WHR Law). Effect of sale made to satisfy a warehouseman’s lien or in case when the goods are perishable or hazardous in nature

WAREHOUSEMAN’S LIEN

The WHM shall not thereafter be liable for failure to deliver the goods to the depositor or owner of the goods or to a holder of the receipt given for the goods when they were deposited, even if such receipt be negotiable (Sec. 36, WHR Law).

Charges covered by a Warehouseman’s lien (PMA) 1.

2.

3.

Charges for storage and Preservation of the goods (insurance and others may be included as long as it is stipulated) Money advanced, interest, insurance, transportation, labor, weighing, coopering and other charges and expenses in relation to such goods Charges and expenses for notice, and Advertisements of sale, and for sale of the goods where default had been made in satisfying the WHM’s lien (Sec. 27, WHR Law).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

By Refusing to deliver the goods until the lien is satisfied By causing the Extrajudicial sale of the property and applying the proceeds of the value of the lien By filing a civil action for Collection of the unpaid charges or by way of counterclaim in an action to recover the property from him or such other remedies allowed by law for the enforcement of a lien against personal property or to a creditor against his debtor, for the collection from the depositor of all the charges which the depositor has bound himself to pay.

Manner of conducting the execution sale to satisfy the warehouseman’s lien 1.

18

Notice of the sale a. published once a week for two consecutive weeks in a newspaper published in the place where such sale is to be held; or b. If there is no newspaper published in such place, the advertisement shall be posted at

WAREHOUSE RECEIPTS LAW least ten days before such sale in not less than six conspicuous places therein.

National Bank, vs. Hon. Marcelino L. Sayo, JR., in his capacity as Presiding Judge of the Regional Trial Court of Manila (Branch 45), et al., G.R. No. 129918, July 9, 1998).

NOTE : The notice shall indicate the following: 1. Description of the goods to be sold; 2. Name of the owner or person on whose account the goods are held; and 3. Time and place of the sale

2. 3.

Sale shall be held not less than fifteen days from the time of the first publication. In the place where the lien was acquired.

NOTE: The balance, if any, of the proceeds of the execution sale shall be held by the WHM and delivered on demand to the person to whom he would have been bound to deliver or justified in delivering goods (Sec.31, WHR Law).

Effect of the non-publication of the notice of sale Where the sale was made without the publication required and before the time provided by law, such sale is void and the purchases of the goods acquires no title to them. A person claiming right over the property may stop the execution sale of the goods At any time before the goods are so sold, any person claiming a right of property or possession therein may pay the WHM 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 (Sec.33, WHR Law). Instances when a warehouseman may lose his lien 1. 2.

By surrendering possession thereof, or By refusing to deliver the goods when a demand is made with which he is bound to comply (Sec. 29).

NOTE: Where a negotiable receipt is issued, with the exception of the charges for the storage or preservation of goods for which a negotiable receipt has been issued, the lien exists only for other charges expressly enumerated in the receipt so far as they are written although the amount of the said charge is not stated.

When Warehouseman fees and charges cease to accrue The warehouseman fees and charges cease to accrue from the date of rejection by the warehouseman to heed the lawful demand by the endorsee of the quedan for the release of the goods (Philippine

19

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Incidents in the life of a negotiable instrument

NEGOTIABLE INSTRUMENTS LAW

1. 2. 3.

It is a written contract for the payment of money which is intended as a substitute for 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. The instrument must comply with Sec. 1 of the Negotiable Instruments Law (NIL) (Sundiang & Aquino, 2014).

Issue Negotiation Presentment for acceptance (in certain kinds BOE’s) 4. Acceptance 5. Dishonor by non-acceptance 6. Presentment for payment 7. Dishonor by non-payment 8. Notice of dishonor 9. Protest in case of foreign bill 10. Discharge

Negotiable instrument v. Non-negotiable instrument

Negotiable instruments are not legal tender

Negotiable instrument

NEGOTIABLE INSTRUMENT Governing Law

Manner of Transfer

Status of Transferee

Defenses Available

NIL.

Can be transferred by negotiation or by assignment. The transferee can be a holder in due course if all the requirements of Section 52 of the NIL are complied with.

Negotiable instruments are neither money nor legal tender; they are mere substitutes for money (NCBA, Sec. 60).

NON-NEGOTIA BLE INSTRUMENT The Civil Code or pertinent special laws should apply (GSIS v. CA, 170 SCRA 533, 1989). Can be transferred only by assignment. The transferee can never be a holder in due course but remains to be an assignee.

GR: The delivery of a negotiable instrument does not by itself produce the effect of payment (Roman Catholic Bishop of Malolos vs. Intermediate Appellate Court, 191 SCRA 411, 1990). XPNs: Negotiable instrument shall produce the effect of payment when: 1. When they have been cashed, or when through the fault of the creditor they have been impaired (NCC, Art. 1249). 2. If a check representing demand deposit has been cleared and credited to the account of the creditor, such shall be equivalent to delivery to the creditor of cash (NCBA, Sec. 60). Q: Negotiable instruments are used as substitutes for money, which means - (2012 Bar Question) a.) That they can be considered legal tender. b.) That when negotiated, they can be used to pay indebtedness. c.) That at all times the delivery of the instrument is equivalent to delivery of the cash. d.) That at all times negotiation of the instruments requires proper indorsement.

All defenses available to prior parties may be raised against the last transferee.

A: B. When negotiated, negotiable instruments can be used to pay indebtedness.

(Sundiang, 2014) Laws governing a negotiable instrument

Characteristics instrument

1. NIL - For instruments which meet the requisites of negotiability. 2. New Civil Code (NCC) – Applies suppletorily in cases of assignment and demand for payment of an NIL. 3. Code of Commerce – Applies suppletorily to NIL in cases of crossed checks. UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

or

features

of

a

negotiable

1. Negotiability – The note may pass from hand to hand similar to money so as to give the holder in due course (HIDC) the right to hold the instrument and collect the sum payable for himself free from any infirmity in the

20

NEGOTIABLE INSTRUMENTS LAW instrument or defect in the title of any of the prior parties or defenses available to them among themselves.

Q: A promissory note which does not have the words "or order" or "or bearer" will render the promissory note non-negotiable, and therefore (2012 Bar Question) a.) It will render the maker not liable b.) The note can still be assigned and the maker made liable; c.) The holder can become holder in due course; d.) The promissory note can just be delivered and the maker will still be liable

2. Accumulation of secondary contracts – A characteristic of a negotiable instrument where additional parties become involved as they are transferred from one person to another. Once an instrument is issued, additional parties can become involved (De Leon, 2010).

FORMS AND INTERPRETATION

A: B. The note can still be assigned and the maker made liable

Form of negotiable instruments (Requisites of negotiability)

Rules of construction in case of ambiguities in a negotiable instrument

An instrument to be negotiable must conform to the following requirements: (SUn-DOrA) 1. It must be in writing and Signed by the maker or drawer; 2. Must contain an Unconditional promise or order to pay a sum certain in money; 3. Must be payable on Demand, or at a fixed or determinable future time; 4. Must be payable to Order or to bearer; and 5. Where the instrument is Addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty (NIL, Sec.1).

1. 2.

3. 4. 5. 6. 7.

NOTE: A NI need not follow the exact language of NIL, as long as the terms are sufficient which clearly indicate an intention to conform to the requirements of the law (NIL, Sec. 10).

Words prevail over figures If date from which interest is to run is unspecified, interest runs from the date of the instrument; if undated, from the issue thereof If undated, instrument is considered dated as of the time it was issued Written provisions prevail over printed If there is doubt whether it is a bill or note, the holder may treat it as either at his election When not clear in what capacity it was signed, deemed signed as an indorser When two or more persons signed a negotiable instrument stating "I promise to pay," in case of liability, they shall be deemed to be jointly and severally liable (NIL, Sec. 17). REQUISITES OF NEGOTIABILITY

The requirements stated in Sec. 1 must appear on the face of the instrument otherwise the instrument would not be negotiable.

Factors to determine the negotiability (FRI) 1.

Rules governing the use of phrases in the negotiable instruments

2. 3.

1. As to promissory note a. The word “promise” need not be used. Any expression equivalent to a promise is sufficient. b. Mere acknowledgment of a debt is not a promissory note. c. Language used must indicate a written undertaking to pay 2. As to bill of exchange a. It must contain an order for payment as distinguished from a mere request. b. The order is not invalidated because it contains words of civility. Thus, insertion of polite words like “please” does not alter the character of the instrument; as long as the language expresses the drawer’s will that the money be paid.

Words that appear on the Face of negotiable instrument Requirements enumerated in Section 1 of NIL Intention of the parties by considering the whole of the instrument.

NOTE: In determining the negotiability of an instrument, consider the instrument in its entirety and only what appears on its face. It must comply with the requirements under Section 1 of the NIL (Sundiang, 2014 citing Caltex Phils. v. CA, 212 SCRA 448).

The instrument must be in writing It must be reduced in writing or in tangible form. The negotiability or non-negotiability of an instrument is determined from the writing on the face of the instrument itself (De Leon, 2010).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW instrument payable out of a particular fund is non-negotiable. In this latter case, the fund specified is the direct source of payment; therefore, it is subject to the availability of fund, hence conditional.

The instrument must be signed by the maker or drawer It is placed at the lower right hand corner of the instrument. Nonetheless, it may appear in any part of the instrument whether at the top, middle or bottom or at the margin (De Leon, 2010).

Certainty as to sum A sum is certain within the contemplation of Section 1(b) of the NIL if the amount that is to be unconditionally paid by the maker or drawee can be determined on the face of the instrument even if it requires mathematical computation (Sundiang, 2014).

However, 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 (NIL, Sec. 17 [f]). NOTE: The signature is valid and binding as long as it appears that a person intended to make the instrument his own. The signature is prima facie evidence of a person’s intention to be bound as either maker or drawer.

The sum payable is a sum certain within the meaning of this Act, although it is to be paid: (ISDEA) 1. With Interest; or 2. By Stated installments; or 3. By stated installments, with a provision upon Default in payment of any installment or of interest, the whole shall become due ( acceleration clause); 4. With Exchange, whether at a fixed rate or at the current rate; or 5. With cost of collection or an Attorney’s fees, in case payment shall not be made at maturity (NIL, Sec. 2).

Unconditional promise or order to pay The word “promise” or “order” need not appear in the instrument to satisfy the requirements of Section 1(b) of the NIL (Sundiang, 2014). The promise or order to pay must not be subject to any condition or contingency. An instrument payable upon a contingency is not negotiable even if the condition thereon has been fulfilled.

Payment with interest

An unqualified order or promise to pay is unconditional though coupled with: 1. An indication of particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or 2. A statement of the transaction which gave rise to the instrument. But an order or promise to pay out of a particular fund is conditional (NIL, Sec 3).

Interest at fixed rate or at increased or reduced rate will not destroy negotiability because the presence of such interest does not make uncertain the sum payable. In the absence of a date as to which interest is to run, it shall be from the date of instrument, or in the absence thereof, at the date of issue. In the absence of interest rate, it shall be the legal rate.

Indication of particular fund for reimbursement v. Indication of particular fund for payment FUND FOR REIMBURSEMENT 1. The drawee pays the payee from his own funds. 2. The drawee pays himself from the particular fund indicated. Particular fund indicated is not the direct source of payment. (Sundiang, 2014).

Payment by installment

FUND FOR PAYMENT There is only one the drawee directly from particular indicated.

Payment by installment is certain if the dates of each installment is fixed and the amount to be paid for each installment is stated (NIL, Sec. 2; Sundiang, 2009).

act pays the fund

Payment with an acceleration clause Acceleration clause is a provision, that upon default in payment of any installment or interest, the whole shall become due (NIL, Sec.2[c]). 1. If the option to accelerate the maturity is on the maker, whether such option is absolute or conditional, it is negotiable. 2. Where acceleration is at the option of the holder and can only be exercised upon the happening of the specified event, still negotiable. 3. But where the holder’s right to accelerate is

Particular fund indicated is the direct source of payment.

NOTE: An instrument which mentions a particular fund out of which reimbursement is to be made is negotiable. But an UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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NEGOTIABLE INSTRUMENTS LAW unconditional, the time of payment is rendered uncertain, the instrument would not be negotiable.

Effect if a bill or note is payable other than in money GR: The note or bill must be payable in money. If payable in goods, wares, or merchandise, or in property, the same is not negotiable.

Extension clause Extension Clauses are provisions extending the time of payment.

XPNs: Negotiability is not affected if the note contains an additional provision which: (SECo Law) 1. Authorizes the sale of collateral Securities in case the instrument be not paid at maturity; or 2. Gives the holder an Election to require something to be done in lieu of payment of money; or 3. Authorizes a Confession of judgment if the instrument be not paid at maturity; or 4. Waives the benefit of any Law intended for the advantage or protection of the obligor (NIL, Sec. 5).

GR: An extension clause does not affect the negotiability of the instrument. XPN: Where a note with a fixed maturity provides that the maker has the option to extend time of payment until the happening of a contingency, the date is uncertain and the instrument is non-negotiable. Sum to be paid with exchange

Payable on demand or at a fixed or determinable future time

The exchange is the charge for the expense of providing funds at the place where the instrument is payable to cover such instrument which is issued at another place. It may be at a fixed rate or at the current rate. It is applicable only to foreign bills (De Leon, 2010).

1. Payable on demand – The holder may call for payment any time, likewise, the maker may also pay any time and the refusal of the holder to accept payment shall stop the running of interest should there be any, but obligation to pay the note subsist.

Inland bill of exchange v. Foreign bill of exchange

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 (NIL, Sec 7). c. 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 (ibid).

An inland BOE is one which is, or on its face purports to be, both drawn and payable within the Philippines and any other bill is a foreign bill. NOTE: Unless the contrary appears on the face of the bill, the holder may treat it as an inland bill (Sec. 109, NIL).

Sum to be paid with costs of collection and/or attorney’s fees

2. At a fixed time – A term or time instrument is payable only upon the arrival of the time for payment.

It does not affect the certainty of the amount payable at maturity since the increase in the amount due, even if uncertain, takes place after maturity when the instrument ceases to be negotiable in the full commercial sense (De Leon, 2010).

3. At a determinable future time - An instrument is payable at a determinable future time 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 (NIL, Sec. 4).

Payable in Philippine Peso The “money” referred into may be our legal tender or foreign currency. An instrument is still negotiable although the amount to be paid is expressed in currency that is not legal tender so long as it is expressed in money (PNB v Zulueta, 101 Phil 1071). NOTE: An agreement to pay in foreign currency is valid (RA 8183).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Payable to order

Fictitious-Payee rule

The instrument is payable to order where it is drawn payable to the order of a specified person or to him or to his order. It may be drawn payable to the order of: (PaDD JoinSH) 1. A Payee who is not a maker, drawer, or drawee; 2. The Drawer or maker; or 3. The Drawee; or 4. Two or more payees Jointly; or 5. One or some of Several payees; or 6. The Holder of an office for the time being (Sec. 8, NIL).

A check is a “bill of exchange” (BOE) drawn on a bank payable on demand. It is either an order or a bearer instrument but when the payee is fictitious or not intended to be the true recipient of the proceeds of the check, the check is considered as a bearer instrument and as such it does not require indorsement to be validly negotiated. It is negotiable by mere delivery (Divina, 2010, citing PNB v. Rodriguez, 566 SCRA 513).

Payable to bearer (ENaF PaLa)

A “fictitious payee” is not limited to person having no real existence. An actual, existing, and living payee may also be “fictitious” if the maker of the check did not intend for the payee to in fact receive the proceeds of the check (Ibid., pg. 10, PNB case citing Sec. 9[c], NIL).

1. 2. 3.

4. 5.

Application of the fictitious-payee rule

When it is Expressed to be so payable; (e.g. I promise to pay to bearer P10,000.00) When it is payable to a person Named therein or bearer; (e.g. Pay to P or bearer P10,000.00) When it is payable to the order of a Fictitious person or non-existing person, and such fact was known to the person making it so payable; (e.g. Pay to John Doe or order) When the name of the Payee does not purport to be the name of any person; (Pay to cash) When the only or the Last indorsement is an indorsement in blank (NIL, Sec 9).

Who bears the loss in a fictitious-payee situation In a fictitious-payee situation, the drawee bank is absolved from liability and the drawer bears the loss. When faced with a check payable to a fictitious payee, it is treated as a bearer instrument that can be negotiated by delivery. The underlying theory is that one cannot expect a fictitious payee to negotiate the check by placing his indorsement thereon. And since the maker knew this limitation, he must have intended for the instrument to be negotiated by mere delivery. Thus, in case of controversy, the drawer of the check will bear the loss (Ibid).

Illustration Back of NI (indorsement) Pay to A Pay to B

Sgd. P Sgd. A Sgd. B

Exception to the fictitious-payee rule A showing of commercial bad faith on the part of the drawee or any transferee of the check for that matter, will work to strip it of this defense (Ibid).

Difference between having a check payable to a fictitious payee and payable to a specified payee If a check is payable to a specified payee, it is an order instrument, which requires indorsement from the payee or holder before it may be validly negotiated; but it may nevertheless be considered as a bearer instrument if it is payable to the order of a fictitious or non-existing person, and such fact is known to the person making it so payable. Thus, checks issued to “Prinsipe Abante” or “Si Malakas at si Maganda,” who are well-known characters in Philippine mythology, are bearer instruments because the named payees are fictitious and non-existent (ibid., pg. 9-10).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

When drawee must be named with reasonable certainty 1.

2.

3.

24

In a BOE, the drawee must be named or otherwise designated with reasonable certainty (NIL, Sec. 1). A bill may be addressed to two or more drawees jointly, but not to two or more drawees in the alternative or in succession (NIL, Sec. 127). Eg. An instrument may be addressed “to A and B” but not “to A or B”. An instrument payable “to the order of the bearer” has been held to be an instrument payable to “order” (10 C.J.S. 575-576).

NEGOTIABLE INSTRUMENTS LAW Provisions that do not affect the negotiability of an instrument (DVNo S. CurSECo Law) 1. 2. 3. 4. 5.

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 (NIL, Sec. 184).

Omission of Date Non-specification of Value given or that any value had been given Non-specification of place where it is drawn or payable Bears a Seal Designation of particular kind of Currency in which payment is to be made. (Sec. 6, NIL.)

2. Bill of exchange (BOE) – An unconditional order in writing addressed by one person to another signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer (Sec. 126, NIL).

Additional provisions which: 1. Authorizes the sale of collateral Securities on default 2. Gives the holder an Election to require something to be done in lieu of payment of money. 3. Authorizes Confession of judgment on default 4. Waives the benefit of the Law intended for the protection of the obligor (NIL, Sec. 5).

NOTE: A check is a bill of exchange drawn on a bank payable on demand (Sec 185, NIL).

Promissory note v. Bill of exchange

Undertaking As to number of original parties

Q: B borrowed Php1 million from L and offered to him his BMW car worth Php 1 Million as collateral. B then executed a promissory note that reads: “I, B, promise to pay L or bearer the amount of Php1 Million and to keep my BMW car (loan collateral) free from any other encumbrance. Signed, B.” Is this note negotiable? (2011 Bar Question)

As to liability of parties As to number of presentments needed

A: No, since it contains a promise to do an act in addition to the payment of money. NOTE: What will not affect the negotiability of the instrument is an additional provision which gives an election to require something to be done in lieu of payment of money.

PROMISSORY NOTE Promise to pay 2 parties Maker is primarily liable Only 1 presentment (for payment) is needed

BILL OF EXCHANGE Order to pay 3 parties (upon acceptance of the drawee) Drawer is secondarily liable 2 presentments (for acceptance and for payment) are generally needed

A bill of exchange is not considered as an assignment of funds in the hands of the drawee A bill of exchange 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 (Sec. 127, NIL).

Q: A writes a promissory note in favor of his creditor, B. It says: “Subject to my option, I promise to pay B Php1 Million or his order or give Php1 Million worth of cement or to authorize him to sell my house worth Php1 Million. Signed, A.” Is the note negotiable? (2011 Bar Question)

A bill of exchange may be addressed to more than one drawee

A: No, because the exercise of the option to pay lies with A, the maker and debtor.

A bill of exchange may be addressed to two or more drawees jointly, whether partners or not; but not to two or more drawees in the alternative or in succession (Sec. 128, NIL).

Note: In order not to affect the negotiability of the instrument, the option must be with the holder/creditor.

KINDS OF NEGOTIABLE INSTRUMENTS

Instances when a bill of exchange may be treated as promissory note

Kinds of negotiable instruments

1. Where in a bill the drawer and the drawee are the same person (Sec. 130, NIL)

1. Promissory notes (PN) – An unconditional promise in writing made by one person to another, signed

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW 2. The drawee is a fictitious person (Sec. 130, NIL) 3. The drawee does not have the capacity to contract (Sec. 130, NIL) 4. Where the instrument is so ambiguous that there is doubt whether it is a bill or a note, the holder may treat it as either at his election (NIL, Sec. 17[e])

Acceptance of the bill of exchange by the drawee is not an important requisite for the instrument’s negotiability The acceptance of a bill of exchange is not important in the determination of its negotiability. The nature of acceptance is important only in the determination of the kind of liabilities of the parties involved (PBCOM v Aruego, 102 SCRA 530).

Parties to a negotiable instrument and their liabilities

Drawer v. Maker PARTIES FUNCTION Drawer The person who issues and draws the bill. BOE Drawee

The party upon whom the bill is drawn.

LIABILITY Secondarily liable, except when drawee refused to accept Not liable until he becomes acceptor

Kind of involved

NI

Liability

Limitation of Liability

The party to whom The party to payment is whom originally payable. payment is originally payable. Acceptor The acceptor is the Primarily drawee who liable accepts the bill

DRAWER

MAKER

Issues a BOE

Issues a PN

Only secondarily liable Can limit his liability by putting “without recourse”

Primarily liable

Cannot limit liability

Payee

PARTIES Maker PN

Payee

COMPLETION AND DELIVERY Steps in the issuance of a negotiable instrument 1. The mechanical act of writing the instrument completely and in accordance with Sec. 1 of NIL. 2. Delivery of the complete instrument by the maker or the drawer to the payee or holder with the intention of giving effect to it.

FUNCTION LIABILITY One who makes Primarily the promise and liable signs the instrument. The party to whom payment is originally payable.

Delivery It refers to the transfer of possession, actual or constructive, from one person to another (NIL, Sec. 191), with the intent to transfer title to payee and recognize him as holder thereof. Incomplete instrument

Referee in case of need

An instrument is incomplete when it is wanting in any material particular (NIL, Sec. 14).

Referee in case of need is the person named by the drawer or indorser in the NI as the one to whom the holder may resort in case the BOE is dishonored by non-acceptance or non-payment.

Various situations involving negotiable instruments 1. Incomplete instrument a. Delivered i. With forgery and alteration ii. Without forgery and alteration b. Not delivered i. With forgery and alteration ii. Without forgery and alteration

NOTE: It is the option of the holder to refer to the referee in case of need or not as he may see fit (Sec. 131, NIL.)

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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NEGOTIABLE INSTRUMENTS LAW 2. Complete instrument a. Delivered i. With forgery and alteration ii. Without forgery and alteration b. Not delivered i. With forgery and alteration ii. Without forgery and alteration

Effect of ante-dating or post-dating an instrument If the instrument is ante-dated or post-dated, the instrument is not invalid by that fact alone, provided it is not done for illegal or fraudulent purpose (Sec. 12, NIL). COMPLETION OF BLANKS

Rule when an instrument is complete and delivered Meaning of a material particular If an instrument is complete and delivered without forgery and alteration, all parties are bound.

It is any particular proper to be inserted in a negotiable instrument to make it complete.

INSERTION OF DATE Prima facie authority to fill up the blanks Necessity of a date in order to make an instrument negotiable

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 (ibid).

GR: The date is not essential to the negotiability of the instrument (not one of the requirements under sec. 1). NOTE: If the negotiable instrument is dated, such date is deemed a prima facie proof that it is the true date of the making, drawing, acceptance or indorsement of the instrument (NIL, Sec. 11).

NOTE: 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 (ibid).

XPNs: Date is important to determine maturity: 1. Where the instrument is payable within a specified period after date, or after sight. 2. When the instrument is payable on demand, date is necessary to determine whether the instrument was presented within a reasonable time from issue, or from the last negotiation. 3. When the instrument is an interest-bearing one, to determine when the interest starts to run.

Effect if a completed instrument was negotiated to a holder in due course After completion, the completed instrument which was subsequently negotiated to a HIDC, 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 (ibid).

Instance when a holder may insert the date in an instrument

NOTE: Hence, the defense that the blanks were filled up beyond the authority given and/ or beyond the reasonable time, is not available as against a HIDC. This defense is merely a personal one.

1. Where an instrument expressed to be payable at a fixed period after date is issued undated, or 2. Where the acceptance of an instrument payable at a fixed period after sight is undated (NIL, Sec. 13).

INCOMPLETE BUT DELIVERED INSTRUMENTS (Sec. 14)

Effect of insertion of a wrong date

Person authorized to fill up the blanks in an incomplete but undelivered instrument

The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course, but as to a HIDC, the date so inserted is to be regarded as the true date (ibid.).

The holder has a prima facie authority to complete it (NIL, Sec. 14).

NOTE: With respect to the person who inserted the wrong date, however, the instrument is avoided (Bank of Houston v. Day, 145 Mo. Appl. 410, 122 SW 756).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Distinctions among Sec. 14, 15, and 16 SEC 14 Incomplete instrument which has been delivered by the maker or the drawer to the payee or holder. 1. Where instrument is wanting in any material particular, the person in possession has prima facie authority to complete it by filing up blanks therein. 2. When the instrument is merely a signature on blank paper delivered by person making the signature in order that the paper may be converted into a NI, the person in possession has prima facie authority to fill up as such for any amount.

SEC 15 Incomplete and undelivered instrument.

SEC 16 Complete instrument but undelivered.

Instrument will not be a valid contract in the hands of any holder, if completed and negotiated without authority.

1. If instrument is not in possession of party who signed, a valid and intentional delivery by him is prima facie presumed.

out about the transaction, he directed the drawee bank to dishonor the check. When Evelyn encashed the check, it was dishonored. Is Lorenzo liable to Evelyn? (2006 Bar Question) A: Yes. This covers the delivery of an incomplete instrument, under Section 14 of the Negotiable Instruments Law, which provides that there was prima facie authority on the part of Nicky to fill-up any of the material particulars thereof. Having done so, and when it is first completed before it is negotiated to a holder in due course like Evelyn, it is valid for all purposes, and she may enforce it within a reasonable time, as if it had been filled up strictly in accordance with the authority given. INCOMPLETE AND UNDELIVERED INSTRUMENTS (Sec. 15) Rule when an instrument is incomplete and undelivered

2. If holder is HIDC, valid delivery by all parties prior to him so as to make them liable to him is conclusively presumed.

Where an incomplete instrument has not been delivered, the holder, whether HIDC or not, cannot validly enforce such instrument against the party whose signature was placed before delivery (NIL, Sec. 15). NOTE: Non-delivery of an incomplete instrument is a real defense (ibid.)

Enforcement of the instrument against the party whose signature was placed after delivery The instrument can be validly enforced against the party whose signature was placed after delivery like an indorser because the indorser warrants the instrument to be genuine and in all respect what it purports to be. NOTE: An HIDC cannot hold liable a maker for instruments which are incomplete and undelivered even supposing that the note was stolen, filled-up, and was subsequently negotiated. The law is specific that the instrument is not a valid contract in the hands of any holder. The phrase “any holder” includes a HIDC.

NOTE: The holder must only act in accordance with the authority granted him, otherwise it may be used as a defense against him.

COMPLETE BUT UNDELIVERED (Sec. 16) Effect if an instrument is undelivered It is incomplete and revocable until delivery of the instrument for the purpose of giving it effect (NIL, Sec. 16). Delivery is essential to the validity of any negotiable instrument (Sundjang, 2009).

Q: Lorenzo signed several blank checks instructing Nicky, his secretary, to fill them as payment for his obligations. Nicky filled one check with her name as payee, placed P30,000.00 thereon, endorsed and delivered it to Evelyn as payment for goods the latter delivered to the former. When Lorenzo found UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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NEGOTIABLE INSTRUMENTS LAW Where a debtor who drew two checks payable to his creditor never delivered the checks to his creditor and a third party was able to collect the proceeds of the checks by forging the endorsement of the creditor as payee, the creditor has no cause of action against anyone on the basis of the checks, since the payee acquires no interest in the check until its delivery to him (Development Bank of Rizal v. Sim Wei, 219 SCRA 736).

Immediate parties Immediate parties are persons having knowledge of the conditions or limitations placed upon the delivery of an instrument. It means privity, and not proximity. Remote parties Persons without knowledge as to the conditions or limitations placed upon the delivery of an instrument, even if he is the next party physically.

However, in another case, the Court held that the payee of a check can sue a collecting bank to whom the check was deposited with a forged endorsement even if the check was never delivered to the payee, to avoid a circuity of suits (Westmont Bank v. Ong, 375 SCRA 212).

SIGNATURE Validity of signature in a negotiable instrument

NOTE: The defense of want of delivery of a complete instrument is only a personal defense which means that it is only available against a holder NOT in due course.

A party may use his full name, surname, initials or even any mark in signing a negotiable instrument to indicate his intention to bind himself.

Issuance of an instrument

NOTE: A signature maybe made in any manner as long as the person signing has the intention to be bound.

The instrument is deemed issued upon the first delivery of the instrument, complete in form, to a person who takes it as holder (NIL, Sec. 191).

Persons liable on an instrument

Conditional delivery or delivery for a special purpose

GR: Only persons whose signatures appear on an instrument are liable thereon (NIL, Sec. 18).

The delivery is made conditional or for a special purpose if it was made not for the purpose of transferring the property (title) to the instrument. In such case, if the instrument lands in the hands of a HIDC (one who does not know of the conditional delivery or of its special purpose), the instrument is treated as if there is no condition.

XPNs: Notwithstanding the absence of their signatures in their own names, the following persons are deemed liable: (TraP FAP) 1. Person who signs in Trade or assumed name (Sec. 18, NIL.) – Party who signed must have intended to be bound by his signature. 2. Principal who signs through a duly authorized agent and such agent discloses the name of his principal and adding words to show he is merely signing in a representative capacity (NIL, Sec. 19, 20). 3. Forger (NIL, Sec. 23) 4. Acceptor, who makes his acceptance of a bill on a separate paper (NIL, Sec. 134) 5. Person, who makes a written Promise to accept the bill before it is drawn (NIL, Sec. 135)

if such delivery was made to a holder not in due course, prior parties are not bound by the instrument (NIL, Sec. 16). NOTE: The law contemplates that the condition is orally or verbally conveyed to the holder upon delivery, because of the rule that the negotiability is determined only upon the face of the instrument.

Presumption as to delivery

NOTE: Where a signature is so placed upon the instrument that it is not clear in what capacity the person signed, he is deemed to be an indorser (NIL, Sec. 17[f]), not a maker or drawer.

If the instrument is in the possession of a HIDC, valid delivery is conclusively presumed.

Q: Juan borrowed P10,000 from Joe as evidenced by a promissory note. All other requisites of negotiability are present except that Juan did not affix his usual signature thereon as he was ailing at that time and was only able to put “X” in the blank space meant for the signature of the maker. Is the

If the instrument is in the possession of a party other than a HIDC, possession of such party constitutes only prima facie presumption of delivery.

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW requisite that the instrument must be signed by the maker complied with?

defense that can be invoked by a minor. However, it is not a defense which may be setup by parties other than a minor.

A: Yes. The letter “X” is sufficient to comply with the requirement. It appears from the problem that such letter was adopted by Juan with the intent to authenticate the instrument. It is not necessary that the signature is the usual signature of the maker.

2. Incapacitated person – An incapacitated person may also use as a real defense his incapacity to enter into a contract. Contract entered into by the incapacitated are voidable. Incapacitated persons include: a) insane or demented persons and b) deaf and blind who does not know how to write.

SIGNING IN TRADE NAME

3. Corporation - Issuance or indorsement of an instrument by a corporation acting beyond its powers is a REAL defense.

As a general rule, only persons whose signatures appear on an instrument are liable thereon. But one who signs in a trade or assumed name is liable as if he signed his own name (NIL, Sec. 18). It is necessary, however, that the party who signed intended to be bound by his signature.

Transfer of instrument by a minor While a minor is not bound by his indorsement for lack of capacity, he is however not incapacitated to transfer his rights.

SIGNATURE OF AGENT Requisites for an agent to be exempt from liability

Minor can be bound by his representation that he is of legal age

1. He is duly authorized 2. He adds words to his signature indicating that he signs as an agent/representative and 3. He discloses the name of his principal (NIL, Sec. 20).

Where he committed actual fraud by specifically stating that he is of legal age, a minor can be bound by his signature in an instrument (PNB v. CA, G.R. No. L-34404, June 25, 1980).

Legal effects of an agent’s signature

Q: A executed a promissory note in favor of M which reads:

Provided that the above requisites are complied with, the legal effects of an agent’s signature in a negotiable instrument are: 1. His signature will bind his principal; and 2. He will be exempt from personal liability.

I promise to pay P (16 years old) or order P10,000. Sgd. M P indorsed it to A.

Procuration 1. May A collect from M notwithstanding that P, the indorser is a minor? 2. In case that A cannot collect from M, can he collect from P?

It is the act by which a principal gives power to another to act in his place as he could himself (Fink v. Scott, 143 S.E. 305) Effect of a signature by procuration

A: 1. Yes. A can collect from M. Notwithstanding the fact that A is a minor, the indorsement of P (the minor) passes title to A (the holder). M cannot invoke the defense of minority because such defense would only be available to P.

It operates as notice or a warning that the agent has but a limited authority to sign and the principal is bound only in case the agent in so signing acted within the actual limits of his authority (NIL, Sec. 21).

2. No. A cannot collect from P, as he has a real defense of minority on his part.

INDORSEMENT BY MINOR OR CORPORATION Effects of indorsement made by an infant or a corporation 1. Minor – A contract entered into by a minor is voidable, at the option of the minor. It is a real UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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NEGOTIABLE INSTRUMENTS LAW FORGERY

since the payee merely used one action to reach, by desirable shortcut, the person who ought in any event to be ultimately liable as among the innocent persons. The payee is allowed to directly recover from the collecting bank to simplify proceedings (Westmont Bank v. Ong, G.R. No. 132560, Jan. 30, 2002).

Forgery It is the counterfeit making or fraudulent alteration of any writing. It happens when a signature is affixed by one who does not claim to act as an agent and who has no authority to bind the person whose signature he has forged (NIL, Sec. 23).

Effects of forgery GR: It does not avoid the instrument but only the forged signature. The signature is wholly inoperative. In other words, rights may still exist and be enforced by virtue of such instrument as to those signatures thereto are found to be genuine.

Burden of proof in proving forgery Forgery, as any other mechanism of fraud must be proven clearly and convincingly, and the burden of proof lies on the party alleging forgery (Chiang Yia Min v. CA, G.R. No. 137932, Mar. 28, 2001).

However, a forged indorsement prevents any subsequent parties from acquiring any right against any party prior to the forgery. Such forged indorsement cuts off the rights against prior parties to the forger (Cut-off rule).

Extent and effects of forgery 1. Only the signature forged or made without authority is the one inoperative, the instrument itself and the genuine signatures are valid. 2. An instrument indorsed which on its face is payable to bearer may be enforced by the holder to whose title over the instrument the forged signature is not necessary. 3. The instrument can be enforced against those who are precluded from setting up forgery.

XPNs: 1. If the party against whom it is sought to enforce such right is precluded from setting up forgery or want of authority (NIL, Sec. 23). 2. Where the forged signature is not necessary to the holder’s title, in which case, the forgery may be disregarded (NIL, Sec. 48).

Illustration Persons precluded from setting up the defense of forgery

Pay to P or order P10,000 30 days after sight. (Sgd)D, (forged by P)

1.

Those who admit/warrant the genuineness of the signature such as indorsers, persons negotiating by delivery and acceptor; (NIL, Sec 56).

2.

Those who by their acts, silence, or negligence, are estopped from claiming forgery;

3.

A holder of a bearer instrument who subsequently negotiates such instrument with a prior forged indorsement (forged indorsement is not necessary to his title it being a bearer instrument).

To X P presented the instrument for acceptance. X accepted the instrument without detecting the forgery. P then indorses the bill to A, A to B, B to C, the present holder. In this case, if after 30 days the holder presented the instrument to X for payment the latter is liable despite the forgery, because by preclusion, the acceptor admits the genuineness of the drawer’s signature (See Sec. 62, NIL) A payee may sue the collecting bank for the amount of the checks it paid under a forged indorsement even when the instrument has not been delivered to him The collecting bank is liable to the payee and must bear the loss because it is its legal duty to ascertain that the payee’s indorsement (signature), its customer, was genuine before cashing the check. That there was no delivery yet and therefore he never became the owner of the check is immaterial

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Liabilities of the parties to a negotiable instrument where an indorsement is forged

or A, because were it not for the forgery of X the instrument will not reach the possession of C. b. If the instrument is payable to bearer, the indorsement of X is not necessary to vest title to C because negotiation on bearer instrument requires only delivery.

ORDER INSTRUMENTS ORDER PROMISSORY ORDER BILL OF NOTE EXCHANGE Prior parties are not Prior parties are not bound. Forged signature bound. Forged signature is wholly inoperative is wholly inoperative unless estoppel sets in unless estoppel sets in with regard prior parties with regard prior parties (cut-off rule). (cut-off rule). Subsequent parties to the forgery are bound

Legal consequences when a bank honors a forged check 1. When drawer's signature is forged – Drawee-bank by accepting the check cannot set up the defense of forgery, because by accepting the instrument, the drawee bank admits the genuineness of signature of drawer (BPI Family Bank v. Buenaventura, G.R. No. 148196, Sept. 30, 2005; NIL, Sec. 23).

Subsequent parties to the forgery are bound NOTE: A drawer’s account cannot be charged by the drawee.

Unless a forgery is attributable to the fault or negligence of the drawer himself, the remedy of the drawee-bank is against the party responsible for the forgery. Otherwise, drawee-bank bears the loss. A drawee-bank paying on a forged check must be considered as paying out of its funds and cannot charge the amount to the drawer (Samsung Construction Co. Phils, v. Far East Bank, G.R. No. 129015, Aug. 13, 2004). If the drawee-bank has charged drawer's account, the latter can recover such amount from the drawee-bank (Associated Bank v. CA, G.R. No. 107382, Jan. 31, 1996; BPI v. Case Montessori Internationale, G.R. No. 149454, May 28, 2004).

The drawer is not liable to the collecting bank, since the duty of the latter is only to the payee. Collecting bank bears the loss. The payee can recover from either the drawer or collecting bank, but not from the drawee unless he accepts the bill.

BEARER INSTRUMENTS BEARER PROMISSORY BEARER BILL NOTE EXCHANGE Prior parties liable. Prior parties liable However, the forged signatory is not liable to a party who is not a holder in due course.

OF

However, the drawer may be precluded or estopped from setting up the defense of forgery as against the drawee-bank, when it is shown that the drawer himself had been guilty of gross negligence as to have facilitated the forgery (Metropolitan Waterworks v. CA, G.R. No. L62943, July 14, 1986).

However, the forged signatory is not liable to a party who is not a holder in due course.

2. Drawee bank versus collecting bank – When the signature of the drawer is forged, as between the drawee-bank and collecting bank, the drawee-bank sustains the loss, since the collecting bank does not guarantee the signature of the drawer. The payment of the check by the drawee bank constitutes the proximate negligence since it has the duty to know the signature of its client-drawer. (Philippine National Bank v. CA, G.R. No. L-26001, Oct. 29, 1968).

Illustration

3. Forged payee's signature – When drawee-bank pays the forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor. In such case, the bank becomes liable since its primary duty is to verify the authenticity of the payee's signature

a. If the instrument is payable to order and the indorsement of one of the indorsers is forged. C can enforce the note against X and B but not against M, P

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NEGOTIABLE INSTRUMENTS LAW (Traders Royal Bank v. Radio Philippines Network, G.R. No. 138510, Oct. 10, 2002; Westmont Bank v. Ong, G.R. No. 132560, Jan. 30, 2002).

2. If the instrument is payable to bearer: a. ABC Bank, the drawee-bank, may charge the amount thereof to the account of the drawer. Because the forged indorsement did not prevent the transfer of title. The remedy of the drawer is against the forger. b. Drawer has no cause of action against collecting bank, since the duty of collecting bank is only to the payee (Manila Lighter Transportation, Inc. v. CA,G.R. No. L-50373 Feb. 15, 1990). Drawee-bank can recover from the collecting bank because even if the indorsement on the check deposited by the bank's client is forged, collecting bank is bound by its warranties as an indorser and cannot set up defense of forgery as against drawee bank (Associated Bank v. CA, G.R. No. 107382, Jan. 31, 1996).

4. Forged indorsement – Drawer's account cannot be charged, and if charged, he can recover from the drawee-bank (Associated Bank v. CA, G.R. No. 107382, Jan. 31,1996). a. The Drawer has no cause of action against collecting bank, since the duty of collecting bank is only to the payee (Manila Lighter Transportation, Inc. v. CA,G.R. No. L-50373 Feb. 15, 1990). b. Drawee-bank can recover from the collecting bank because even if the indorsement on the check deposited by the bank's client is forged, collecting bank is bound by its warranties as an indorser and cannot set up defense of forgery as against drawee bank (Associated Bank v. CA, G.R. No. 107382, Jan. 31, 1996, Great Eastern Life Ins. Co. v. Hongkong & Shanghai Bank, G.R. No. 18657, Aug. 23, 1922).

Q: P sold to M 10 grams of shabu worth Php5,000.00. As he had no money at the time of the sale, M wrote a promissory note promising to pay P or his order Php5,000. P then indorsed the note to X (who did not know about the shabu), and X to Y. Unable to collect from P, Y then sued X on the note. X set up the defense of illegality of consideration. Is he correct? (2011 Bar Question)

Q: X fraudulently obtained possession of the check and forged P’s signature and then indorsed and deposited the check with XYZ bank which honored the check and placed the amount thereof to his credit. Thereafter, XYZ Bank indorsed the check to the drawee bank-ABC bank which paid it and charged the account of the drawer. lllustrate the liability of a drawer and a drawee-bank in an 1) instrument payable to order and in an 2) instrument payable to bearer in case of a forgery on payee’s signature.

A: No, since X, a general indorser, warrants that the note is valid and subsisting. Remedy of the drawee bank in case of a forged indorsement The drawee bank may not debit the account of the drawer but may generally pass liability back through the collection chain to the party who took from the forger and, of course, to the forger himself, if available. If the forgery is that of the payee's or holder's indorsement, the collecting bank is held liable, without prejudice to the latter proceeding against the forger.

Pay to P or order P10,000. (Sgd)D To: ABC Bank A: 1.If the instrument is payable to order, a. The drawee bank is liable to the drawer for the amount of the check and his account cannot be charged because the indorsement of the payee is a forgery. Hence, it is wholly inoperative and therefore, ABC Bank has no right to ask the drawer for its payment. b. XYZ Bank is however, liable to the drawee bank because of his warranty as an indorser. (See Sec.66) c. D, the drawer, is not liable on the check because its order is to pay P or his order and not to any other person.

Since a forged indorsement is inoperative, the collecting bank had no right to be paid by the drawee bank. The former must necessarily return the money paid by the latter because it was paid wrongfully (Associated Bank v. CA, G.R. No. 107382, Jan. 31, 1996).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Liability of the drawee bank and the drawer for the amount paid on checks with forged indorsements, if the same was due to the negligence of both the drawee bank and the drawer

CONSIDERATION Consideration It is an inducement to a contract that is the cause, price or impelling influence, which induces a party to enter into a contract.

The loss occasioned by such negligence should be divided equally between the drawer/depositor and the drawee.

NOTE: Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration (NIL, Sec. 24).

Q: X entrusted his check books, credit cards, passbooks, bank statements and cancelled checks to his secretary. He also introduced the secretary to the bank for purposes of reconciliation of his accounts. Subsequently, X’s secretary forged his signature on the checks and was able to withdraw his money. Is the drawee bank liable for the amounts withdrawn by the secretary?

Holder for value A holder for value is one who has given a valuable consideration for the instrument. A holder for value is deemed as such not only as regards the party to whom the value has been given to by him but also in respect to all those who became parties prior to the time when value was given.

A: No, he is precluded from setting up the forgery due to his own negligence in entrusting to his secretary his credit cards and check book including the verification of his statements of account (Ilusorio v. CA, G.R. No. 139130, Nov. 27, 2002).

NOTE: Where the holder has a lien on the instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent of his lien (NIL, Sec. 27).

Q: The drawer’s signature was forged. There is, however, a provision in the monthly bank statement that if the drawer’s signature was forged, the drawer should report it within 10 days from receipt of the statement to the drawee. The drawer, however failed to do so. What will be its effect insofar as the drawer’s right is concerned? A: The failure of the drawer to report the forgery within ten days from receipt of the monthly bank statement from the drawee bank does not preclude the drawer from questioning the mistake of the drawee bank despite the provision (BPI v. CASA Montessor, G.R. No. 149454, May 28, 2004).

Value It is any consideration sufficient to support a simple contract. NOTE: An antecedent or pre-existing debt constitutes value and is deemed such whether the instrument is payable on demand or at a future time (NIL, Sec. 25).

Want or absence of consideration v. Failure of consideration WANT OR ABSENCE OF CONSIDERATION Total lack of any valid consideration for the contract

Q: If forgery was committed by an employee of the drawer whose signature was forged, does the relationship amount to estoppel such that the drawer is precluded in recovering from the drawee bank? A: The bare fact that the forgery was committed by an employee of the party whose signature was forged can not necessarily imply that such party’s negligence was the cause of the forgery in the absence of some circumstances raising estoppel against the drawer (Samsung Construction Co. v. Far East Bank and Trust Company, G.R. No. 129015, Aug. 13, 2004).

FAILURE OF CONSIDERATION Failure or refusal of one of the parties to do, perform or comply with the consideration agreed upon

Effect of want of consideration It becomes a matter of defense as against any person not a holder in due course, thus, a PERSONAL defense (NIL, Sec. 28). Effect of partial failure of consideration Partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise (ibid.).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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NEGOTIABLE INSTRUMENTS LAW Inadequacy of consideration

Sec. 29) May always show, by parol evidence, that he is only such Cannot avail of the defense of absence/failure of consideration against a holder not in due course May sue reimbursement after paying the holder/subsequent party

GR: Inadequacy of consideration does not invalidate the instrument. XPN: There has been fraud, mistake or undue influence (NCC, Art. 1355). NOTE: However, knowledge of inadequacy of consideration would render the holder not HIDC liable (NIL, Sec. 53).

Q: X borrowed money from Y in the amount of Php 1 Million and as payment, issued a check. Y then indorsed the check to his sister Z for no consideration. When Z deposited the check to her account, the check was dishonored for insufficiency of funds. Is Z a holder in due course? Explain your answer (2012 Bar Question)

May avail

May not sue

Extent of liability of an accommodation party 1. Right to revoke accommodation – before the instrument has been negotiated for value. 2. Right to reimbursement from the accommodated party – the accommodated party is the real debtor. Hence, the cause of action is not on the instrument but on an implied contract of reimbursement. 3. Right to contribution from other solidary accommodation maker (Sadaya v. Sevilla, G.R. No. L-17845, Apr. 27, 1967).

A: No, Z is not a HIDC. Under Sec. 52 (c), NIL, it is expressly provided that the instrument must be acquired in good faith and for value to consider him a HIDC. ACCOMMODATION PARTY Accommodation party

Accommodation party cannot raise the defense of absence or want of consideration

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 (NIL, Sec. 29). Requisites to be an accommodation party

An accommodation party who lends his name to enable the accommodated party to obtain credit or raise money is liable on the instrument to a holder for value even if he receives no part of the consideration. He assumes the obligation to the other party and binds himself to pay the note on its due date. By signing the note, the accommodation party thus became liable for the debt even if he had no direct personal interest in the obligation or did not receive any benefit therefrom (Dela Rama v. Admiral United Savings Bank, G.R. No. 154740, Apr. 16, 2008).

1. Accommodation party must sign as maker, drawer, acceptor or indorser 2. No value is received by the accommodation party from the accommodated party; and 3. The purpose is to lend the name. NOTE: It does not mean, however, that one cannot be an accommodation party merely because he has received some consideration for the use of his name. The phrase “without receiving value therefor” only means that no value has been received “for the instrument” and not “for lending his name.”

Holder for value may recover from accommodation party notwithstanding knowledge of such fact

an his

This is so because an accommodation party is liable on the instrument to a holder for value, notwithstanding that such holder at the time of taking the instrument knew him to be only an accommodation party. The accommodation party is liable to a holder for value as if the contract was not for accommodation. It is not a valid defense that the accommodation party did not receive any valuable consideration when he executed the instrument. Nor is it correct to say that the holder for value is not a holder in due course merely because at the time he

Accommodation party v. Regular party ACCOMMODATION PARTY Signs an instrument without receiving value therefor (NIL, Sec. 29) Purpose of signing is to lend his name to another person (NIL,

Cannot disclaim personal liability by parol evidence

REGULAR PARTY Signs the instrument for value (NIL, Sec. 24) Not for that purpose

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW acquired the instrument, he knew that the indorser was only an accommodation party (Ang Tiong v. Ting, G.R. No. L-26767, Feb. 22, 1968).

indorsers liable if the party primarily liable does not pay.

Accomodation made by a corporation

payment against immediate parties.

MODES OF NEGOTIATION

The issue or indorsement of a negotiable paper by a corporation without consideration and for the accommodation of another is ultra vires. Hence, one who has taken the instrument with knowledge of the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party (Crisologo-Jose v. CA, G.R. No. 80599, Sept. 15, 1989).

Modes of negotiation 1. If payable to bearer- it is negotiated by mere delivery 2. If payable to order- it is negotiated by the indorsement of the holder completed by delivery (NIL, Sec. 30). Delivery of negotiable instrument

NEGOTIATION Delivery means transfer of possession, actual or constructive, from one person or another (NIL, Sec. 191).

Negotiation Negotiation is the transfer of an instrument from one person to another so as to constitute the transferee the holder thereof (Sec. 30).

NOTE: Where the instrument is no longer in the possession of the party whose signature appears thereon, there is a prima facie presumption of a valid and intentional delivery by him (NIL, Sec. 16).

NOTE: A holder is the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof (NIL, Sec. 191).

Effect if a bearer instrument is negotiated by indorsement and delivery

Methods of transferring an instrument 1.

2. 3.

A bearer instrument, even when indorsed specially, may nevertheless be further negotiated by delivery, but the person indorsing specially shall be liable as indorser to only such holders as make title through his indorsement (once a bearer instrument, always a bearer instrument) (NIL, Sec. 40).

Issuance – first delivery of the instrument complete in form to a person who takes it as a holder. Negotiation Assignment – transfer of the title to the instrument, with the assignee generally taking only such title as his assignor has, subject to all defenses available against the assignor.

NOTE: This rule applies only to instruments originally payable to bearer. It does not apply to instruments originally payable to order converted to bearer because the only or last indorsement is in blank.

DISTINGUISHED FROM ASSIGNMENT

Q: A makes a promissory note payable to bearer and delivers the same to B. B, however, endorses it to C in this manner:

Negotiation v. Assignment NEGOTIATION Only a negotiable instrument may be negotiated.

The transferee, if he is a HIDC may acquire better rights than his transferor. The holder can hold the drawer and the

ASSIGNMENT Non-negotiable instrument may be assigned absent any prohibition against assignment written on its face. The transferee can have no better right than his transferor; he merely steps into the shoes of the assignor The transferee has no right of recourse for

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

"Payable to C. Signed: B." Later, C, without indorsing the promissory note, transfers and delivers the same to D. The note is subsequently dishonored by A. May D proceed against A for the note? (1998 Bar Question) A: Yes. D may collect from A. The note made by A is a bearer instrument. Where an instrument, payable to bearer, is indorsed, it may nevertheless be further negotiated by delivery. Despite the special indorsement made by B, the note remained a bearer instrument and can be negotiated by mere delivery.

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NEGOTIABLE INSTRUMENTS LAW When C delivered and transferred the note to D, the latter became a holder thereof. As such, D can proceed against A.

Different kinds of indorsement 1.

Q: X executed a promissory note with a face value of Php50,000.00, payable to the order of Y. Y indorsed the note to Z, to whom Y owed Php30,000.00. If X has no defense at all against Y, for how much may Z collect from X? (2011 Bar Question)

Special (NIL, Sec. 34) – Specifies the person to whom or to whose order the instrument is to be payable. Also known as specific indorsement or indorsement in full. NOTE: An instrument payable to bearer indorsed specially may nevertheless be negotiated by delivery (once a bearer always a bearer) (NIL, Sec. 40).

A: Php 50,000.00, but with the obligation to hold Php20,000.00 for Y's benefit.

2.

Effect of assignment of a negotiable instrument The transferee does not become a holder and he merely steps into the shoes of the transferor. Any defense available against the transferor is available against the transferee (Salas v. CA, G.R. No. 76788 Jan. 22, 1990).

Blank (NIL, Sec. 34) – Specifies no indorsee. a. Instrument is payable to bearer and may be negotiated by delivery; b. May be converted to special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of indorsement (NIL, Sec. 35).

3. Restrictive (NIL, Sec. 36) – When the instrument: a. Prohibits further negotiation of the instrument (it destroys the negotiability of the instrument); b. Constitutes the indorsee the agent of the indorser; (NIL, Sec. 36) c. Vests the title in the indorsee in trust for or to the use of some persons.

Effect of the delivery of an order instrument without indorsement The transfer operates as an ordinary assignment (NIL, Sec. 49). 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 transfereror.

NOTE: But mere absence of words implying power to negotiate does not make an instrument restrictive.

4. Qualified (NIL, Sec. 38) – Constitutes the indorser a mere assignor of the title to the instrument made by adding to the indorser’s signature words like, without recourse, sans recourse or at the indorsee’s own risk (this serves as an ordinary equitable assignment) (NIL, Sec. 38).

NOTE: For the purpose of determining whether the transferee is a HIDC, the negotiation takes effect at the time when the indorsement is actually made.

KINDS OF INDORSEMENTS Indorsement It is the signing of the name of the indorser on the instrument with the intent to transfer title to the same.

5.

Absolute – The indorser binds himself to pay: a. Upon no other condition than failure of prior parties to do so b. Upon due notice to him of such failure

6.

Conditional – Right of the indorsee is made to depend on the happening of a contingent event. Party required to pay may disregard the conditions (NIL, Sec. 39).

Where the indorsement should be placed 1. On the instrument itself; or 2. On a separate piece of paper attached to the instrument called “allonge” (NIL, Sec. 31)

NOTE: The condition refers to the indorsement not on the instrument itself.

Rules on indorsement

7.

GR: Indorsement must be of the entire instrument (NIL, Sec. 32).

Joint – Indorsement made payable to 2 or more persons who are not partners (NIL, Sec. 41). NOTE: All of them must indorse unless the one indorsing has authority to indorse for the others.

1. Irregular (NIL, Sec. 64) – A person who, not otherwise a party to an instrument, places thereon his signature in blank before delivery.

XPN: When the instrument has been paid in part. NOTE: Indorsement to two or more indorsees severally does NOT operate as a negotiation of the instrument.

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW 2. Facultative – Indorser waives presentment and notice of dishonor, enlarging his liability and his indorsement.

Effect of indorsing an instrument to a person as cashier or other officers of a corporation

10. Successive – Indorsement to two persons or more in succession. NOTE: Any of them can indorse to effect negotiation of the instrument.

The negotiable instrument is deemed prima facie payable to the corporation of which said person is such an officer. It may be negotiated further by either indorsement of the corporation or indorsement of the officer (Sec. 42).

Rights of an indorsee in a restrictive indorsement

Date of indorsement

1. To receive payment of the instrument; 2. To bring any action thereon that the indorser could bring; and 3. To transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so (Sec. 37, NIL).

GR: Every negotiation is deemed prima facie to have been effected before the instrument was overdue. XPN: Except where an indorsement bears date after the maturity of the instrument (Sec. 45). Continuation of negotiable character

NOTE: All subsequent indorsees acquire only the title of the 1st indorsee under the restrictive indorsement (Sec. 37, NIL).

GR: An instrument negotiable in origin is always negotiable until paid, which is still true even if the NI was dishonored or is already overdue.

Effect of a qualified indorsement

XPNs: 1. When the instrument has been restrictively indorsed; 2. When discharged by payment or otherwise (NIL, Sec. 47)

A qualified indorsement does NOT destroy the negotiability of the instrument. It only means that the qualified indorser is NOT liable when the maker is insolvent. A qualified indorser is liable only if the instrument is dishonored by non-acceptance or non-payment due to: 1. Forgery; 2. Lack of good title on the part of the indorser; 3. Lack of capacity to indorse on the part of the prior parties; or 4. The fact that at the time of the indorsement, the instrument was valueless or not valid at the time of the indorsement which fact was known to him.

Striking out of an indorsement The holder may, at any time, strike out any indorsement which is not necessary to his title. Indorser whose indorsement is struck out, and all indorsers subsequent to him, are relieved from liability on the instrument (Sec. 48). Negotiation by a prior party Where an instrument is negotiated back to a prior party, such party may reissue and further negotiate the same. But, he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable (NIL, Sec. 50). However, he may strike out the intervening indorsements because they are not necessary for his title and he is liable to them because of his initial indorsement (Sec. 48, NIL).

Instances when the indorsement is considered only as equitable assignment 1. Indorsement of only a part of the amount of the instrument (NIL, Sec. 32) 2. In cases of qualified indorsement (NIL, Sec. 38) 3. Transfer of an instrument payable to order by mere delivery (NIL, Sec. 49).

EX. “A” payee indorsed the instrument to B, then B indorsed it to C, C to D, then D to B. B can further negotiate the instrument. He may also strike out the indorsement of C and D (Sundiang, 2014).

Joint indorsement GR: All must indorse in order for the transaction to operate as a negotiation (NIL, Sec. 41). XPN: Only one of them may indorse in case the 1. Payees or indorsees are partners; and 2. Payee or indorsee indorsing has authority to indorse for the others. UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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NEGOTIABLE INSTRUMENTS LAW Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he had paid the full amount agreed to be paid, he will be deemed a holder in due course only to the extent of the amount paid by him (NIL, Sec. 54).

Limitations on re-negotiation In the following cases, a prior party cannot further negotiate the instrument: 1. Where it is payable to the order of a third person, and it has been paid by the drawer (NIL, Sec. 121[a]). 2. Where it was made or accepted for accommodation and has been paid by the party accommodated (NIL, Sec. 121[b]). 3. In other cases, where the instrument is discharged when acquired by a prior party (NIL, Sec. 119[e]) . RIGHTS OF THE HOLDER

3. Took it in good Faith and for value; 4. 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. (Sec. 52, NIL) NOTE: Knowledge of the agent is constructive knowledge to the principal.

A holder is presumed to be a holder in due course GR: Every holder is deemed prima facie to be a HIDC.

Holder

XPN: When it is shown that the title of any person who has negotiated the instrument was defective. But this is only as regards a party who became such after the acquisition of the defective title (NIL, Sec.59).

The payee or indorsee of a bill or note who is in possession of it or the bearer thereof (NIL, Sec. 191). Classes of holders

Payment in due course

1. Holders in general (Simple Holders) (NIL, Sec. 51). 2. Holders for value (NIL, Sec. 26). 3. Holders in due course (NIL, Secs. 52, 57).

In order for payment to constitute payment in due course, it must be made: 1. At or after the maturity of the instrument 2. To the holder thereof, in good faith and without notice that his title is defective (NIL, Sec. 88).

Rights of a holder in general 1. Right to sue 2. Right to receive payment (NIL, Sec. 51).

Availability of rights to a party who derives his title from a holder in due course

NOTE: If the payment is in due course, the instrument is discharged.

A holder who derives his title through a HIDC, 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 to all parties prior to the latter (NIL, Sec. 58).

HOLDER IN DUE COURSE (HIDC) To be considered as a HIDC, the requisites under Sec. 52 of the NIL must be complied with. A HIDC takes a NI under the following conditions: (COFI)

Specifically, a holder is entitled to the following rights: 1. Hold the instrument free from defenses available to parties among themselves; 2. Hold the instrument free from any defect of title of prior parties; 3. Receive payment; 4. Enforce payment of the instrument for the full amount thereof against all parties liable; and 5. Sue

1. That is Complete and regular upon its face; NOTE: Absence of the required documentary stamp will not make the instrument incomplete (It is not a requisite of negotiability under Sec. 1, NIL and it is not a material particular under Sec. 125, NIL).

2. Became the holder before it was Overdue, and without notice that it has been previously dishonored, if such was the fact;

Shelter principle NOTE: If the instrument is payable on demand, the date of maturity is determined by the date of presentment, which must be made within a reasonable time after its issue, if it is a note, or after the last negotiation thereof, if it is a bill of exchange (NIL, Secs. 71 and 143[a]).

Under the "shelter principle," the HIDC, by negotiating the instrument, to a party not a HIDC, transfers all his rights as such holder to the latter and acquires the right to enforce the instrument as if he

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW was a holder in due course. The principle applies to a "sheltered" holder who is not a party to any fraud or illegality impairing the validity of the instrument.

At the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it

That it is complete and regular upon its face

INFIRMITY Refers to those that vitiate the instrument itself

An instrument is complete when it is not wanting in any material particular and regular when there is no alteration apparent on the face of the instrument. That he became the holder before it was overdue An overdue instrument is still negotiable, and although it is subject to defenses existing at the time of transfer. A negotiable instrument in circulation past its maturity date carries strong indication that it has been dishonored. An overdue instrument puts all person on notice that it might not have been paid because of a valid defense to such payment (De Leon, 2010).

DEFECT Refers to how he obtained the instrument or the signature thereto, as 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 any other circumstances as amount to a fraud. (NIL, Sec. 55)

Instances when the title of a person (transferor) is defective

Without notice that it has been previously dishonored, if such was the fact

1. In its acquisition – 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. 2. In the negotiation – When he negotiates it in breach of faith, or under such circumstances as amount to a fraud (NIL, Sec. 55)

An instrument may be dishonored either by: 1. Non-acceptance (refers to a bill of exchange) or 2. Non-payment An overdue or dishonored instrument may still be negotiated either by indorsement or by delivery to the same extent as before maturity. However, in case of negotiation of an overdue instrument, the holder cannot be a holder in due course while in case of negotiation of a dishonored instrument, the holder without notice can be a holder in due course (De Leon, 2010).

Notice of defect on the transferee The person to whom it is negotiated must have had actual knowledge of such facts or knowledge of other facts that his action in taking the instrument amounted to bad faith (NIL, Sec. 56).

That he took it in good faith and for value Effect of notice before the full amount is paid Good faith is the holder’s well founded or honest belief that the person from whom he received the instrument was the owner thereof, with the right to transfer it (Duran v IAC, 138 SCRA 489).

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 (Sec. 54, NIL).

Value may be some right, interest, profit or benefit to the party who makes the contract or some forbearance, detriment, loan, responsibility, etc. to the other (BPI v. Roxas, G.R. No. 157833, October 15, 2007).

Q: A drawer issued a check for the payment of a car, which check was delivered to the agent of the owner of the car for safekeeping. The check was then used by the agent to pay the medical bills of his wife in a clinic. The projected purchase did not materialize. Is the clinic considered a holder in due course? A: No, the rule that a possessor of the instrument is prima facie a HIDC does not apply to the clinic

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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NEGOTIABLE INSTRUMENTS LAW because he cannot be said to have acquired the negotiable instrument in good faith for there was a defect in the title of the holder (agent), since the instrument was not payable “to the agent or to bearer”; also the drawer had no account with the clinic, the agent did not show or tell the payee why he had the check in his possession and why he was using it for the payment of his own account.

payment, strips the instrument of negotiability and reduces it to a mere voucher or proof of payment. Instances when a person is deemed not a holder in due course 1. A holder who acquires the instrument after its date of maturity. 2. Where an instrument payable on demand is negotiated for an unreasonable length of time after its issue (Sec. 53, NIL).

As holder’s title was defective or suspicious, it cannot be stated that the payee acquired the check without knowledge of said defect in holder’s title, the presumption that the clinic is a HIDC does not exist (De Ocampo & Co. v. Gatchalian, G.R. No. L-15126, Nov. 30, 1961). Possession of a negotiable presentment and dishonor

instrument

NOTE: A note payable on demand is due when payment is demanded. A check becomes overdue when it is not presented for payment within a reasonable time, usually 6 months from date the thereof, afterwards, it becomes a stale check.

after

3.

It does not make the possessor a holder for value within the meaning of the law. It gives rise to no liability on the part of the maker or drawer or indorsers (STELCO Marketing Corp. vs. CA, G.R. No. 96160, June 17, 1992).

Where the instrument contains an acceleration clause, knowledge of the holder at the time of acquisition thereof that one installment or interest, or both, is unpaid is a notice that it is overdue. NOTE: Where indorsement is not dated, it is deemed prima facie to have been negotiated before the instrument was overdue (NIL, Sec. 45). An overdue instrument is still negotiable but it is subject to the defenses existing at the time of the transfer.

Q: Is a corporation to which four crossed checks were indorsed by the payee corporation a holder in due course and hence entitled to recover the amount of the checks when the same had been dishonored for the reason of “payment stopped”?

Rights of a holder who is not a holder in due course The rights of a holder not a HIDC are similar to an assignee. The other rights are: 1. He may receive payment and if the payment is in due course, the instrument is discharged 2. He is entitled to the instrument but holds it subject to the same defenses as if it were non-negotiable 3. He may sue on the instrument in his own name (Sec. 51, NIL).

A: The checks were crossed checks and specifically indorsed for deposit to payee’s account only. From the beginning, the corporation was aware of the fact that the checks were all for deposit only to payee’s account. Clearly then, it could not be considered a HIDC (Atrium Management Corp. v. CA, G.R. No. 109491, Feb. 28, 2001). NOTE: Presence or absence of defect or infirmity must be determined at the time the instrument was negotiated to the holder.

DEFENSES AGAINST THE HOLDER Defenses against the holder

Payee as holder in due course

The defenses available against the holder are classified as follows: 1. Real or Absolute Defenses – those that are attached to the instrument itself and are available against all parties, both immediate and remote, including holders in due course.

There can be no doubt that a proper interpretation of NIL as a whole leads to the conclusion that a payee may be a holder in due course under the circumstances in which he meets the requirements of Sec. 52 (De Ocampo v. Gatchalian, supra).

2. Personal or Equitable Defenses –defenses which are only available against a holder not in due course. Those which grow out of the agreement or conduct of a particular person which renders it inequitable for him, though holding the legal title, to enforce it against the party sought to be made liable.

Drawee as holder in due course A drawee does not become a HIDC by simply paying a bill. A holder refers to one who has taken the instrument as it passes along in the course of negotiation; whereas a drawee, upon acceptance and

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Real defenses available against a holder (IM In Ultra. AFForD PODIF) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

presentment, F learned that T is only 15 years old. F wants to recover from U but the latter insists that a notice of dishonor must first be made, the instrument being a bill of exchange. Is he correct? (2011 Bar Question)

Incomplete and undelivered instrument Minority (available only to the minor) Incapacity as far as incapacitated persons are concerned Ultra –vires acts of a corporation Want of Authority, apparent and real Fraudulent alteration Forgery Duress amounting to Forgery Prescription Other infirmities appearing on the face of the instrument Discharge in insolvency Illegal Contract Fraud in Factum or Esse Contractus

A: No, since F can treat U as maker due to the minority of T, the drawee. NOTE: Where the drawee does not have the capacity to contract, the holder may treat the bill as a PN (Sec. 130, NIL).

LIABILITIES OF PARTIES Party primarily liable v. Party secondarily liable under the Negotiable Instruments Law PRIMARILY LIABLE Unconditionally bound

Personal defenses available against a holder (InnocentS2 ADD FUn In Fraud) 1. 2.

Innocent alteration or spoliation Discharge of party Secondarily liable by discharge of prior party. 3. Set-off between immediate parties 4. Filling up of blanks not in accordance with the Authority given 5. Acquisition of instrument by Duress or force and fear; unlawful means or for an illegal consideration 6. Discharge by payment or renunciation or release before maturity 7. Failure or absence of consideration. 8. Undelivered complete instrument 9. Insertion of a wrong date 10. Fraud in inducement or simple fraud

Absolutely required to pay the instrument upon maturity

Conditionally bound Undertakes to pay only after the ff. conditions have been fulfilled: 1. Due presentment for payment or acceptance to primary party (Sec.143, NIL); 2. Dishonor by such party (Sec.70, NIL); 3. Taking of proceedings required by law (Sec.152, NIL)

Parties primarily liable 1. 2. 3.

NOTE: Fraud in factum exists in those cases in which a person, without negligence, has signed an instrument, but was deceived as to the character of the instrument and without knowledge of it, as where a note was signed by one under the belief that he was signing as a witness to a deed. This kind of fraud is a real defense because there is no contract since the person did not know what he was signing. Fraud in inducement relates to the quality, quantity, value or character of the consideration of the instrument. Here, deceit is not in the character of the instrument but in its amount or terms. This exists when a person is induced to sign a note for the price of a worthless stock which was fraudulently represented by the payee as to its value. Such type of fraud is only a personal defense because it does not prevent a contract (De Leon, The Philippine Negotiable Instruments Law, Annotated, 2010 ed.).

Maker – of a promissory note; Acceptor – of a bill of exchange; and Certifier of a check

Parties secondarily liable 1. 2.

Drawer of a bill; and Indorser of a note or a bill

Person to whom the negotiable instrument should be presented NI should be presented for payment to the party primarily liable (Sec. 72[d], NIL.): 1. Promissory note – maker 2. Bill of exchange – drawee/acceptor

Q: A bill of exchange has T for its drawee, U as drawer, and F as holder. When F went to T for UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

SECONDARILY LIABLE

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NEGOTIABLE INSTRUMENTS LAW The drawee is not liable for payment of a bill of exchange

dishonor be duly taken, he will pay the holder. (Sec. 66, NIL.) Irregular indorser a. In an order instrument, liable to the payee and all subsequent parties b. If bearer instrument or payable to order of maker or drawer, liable to all parties subsequent to the maker or drawer c. If he signs for accommodation of the payee, liable to all parties subsequent to payee. (Sec. 64, NIL.)

The mere issuance of a bill does not operate as an assignment of the funds in the hands of a drawee. The drawee must accept the instrument (thus, becomes an acceptor) in order that he may be primarily liable for the payment of a BOE. Warranties and liabilities of parties who are secondarily liable ABSOLUTE LIABILITY Drawer of a BOE Warrants: a. The existence of payee and his then capacity to indorse b. That the instrument will be accepted or paid upon due presentment by the party primarily liable according to its tenor; and c. That if dishonored, he will pay the party entitled to be paid. (Sec. 61, NIL.)

LIMITED LIABILITY Qualified Indorser Warrants that the: a. Instrument is genuine; b. he has good title to it; c. capacity to contract of all prior parties; and d. no knowledge of any fact which would impair the validity of the instrument. (Sec.65, NIL.)

MAKER Maker The maker of a negotiable instrument, by making such instrument: 1. Engages that he will pay it according to its tenor, and 2. Admits the existence of the payee and his then capacity to indorse (Sec. 60, NIL).

NOTE: He is liable to all parties who derive their title through his indorsement.

General indorser a. Warrants that: i. Instrument is genuine ii. He had good title to it iii. All prior parties had capacity to contract iv. Instrument, at the time of indorsement, was valid and subsisting; b. On due presentment, it shall be accepted or paid, or both according to its tenor c. If the instrument is dishonored and the necessary proceedings on

NOTE: The maker is liable the moment he makes the NI. His liability is primary and unconditional.

Q: On the right bottom margin of a PN appeared the signature of the corporation’s president and treasurer above their printed names with the phrase “and in his personal capacity.” The corporation failed to pay its obligation. Are the officers liable? A: Yes, persons who sign their names on the face of promissory notes are makers and liable as such. The officers are co-makers and as such, they cannot escape liability arising therefrom (Republic Planters Bank v. CA, G.R. No. 93073, Dec. 21, 1992).

Person negotiating by delivery Same warranties as a qualified indorser. But unlike a qualified indorser, a person negotiating by mere delivery is liable only to his immediate transferee. (par. 2, Sec. 65, NIL.)

DRAWER

NOTE: Person negotiating by mere delivery and a qualified indorser’s secondary liability is limited, namely, to their warranties

Drawer The drawer, by drawing the instrument: 1. Admits the existence of the payee and his then capacity to indorse; and 2. Engages that on due presentment the instrument will be accepted or dishonored; and 3. That if 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 (Sec. 61, NIL).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Secondary liability of the drawer

maker engages to pay the negotiable instrument according to the tenor of the bill itself.

The drawer is secondarily liable to the following: 1. The holder or 2. To any subsequent indorser who may be compelled to pay it (ibid.).

Q: X draws a check against his current account with Bonifacio Bank in favor of B. Although X does not have sufficient funds, the bank honors the check when it is presented for payment. Apparently, X has conspired with the bank's bookkeeper so that his ledger card would show that he still has sufficient funds. The bank files an action for recovery of the amount paid to B because the check presented has no sufficient funds. Decide the case (1998 Bar Question).

The drawer may limit his liability to the holder The drawer may insert in the NI an express stipulation negativing or limiting his own liability to the holder (ibid.). Q: D draws a bill of exchange that states: “One month from date, pay to B or his order Php100,000.00. Signed, D.” The drawee named in the bill is E. B negotiated the bill to M, M to N, N to O, and O to P. Due to non-acceptance and after proceedings for dishonor were made, P asked O to pay, which O did. From whom may O recover?(2011 Bar Question) A:

A: The bank cannot recover the amount paid to B for the check. When the bank honored the check, it became an acceptor. As acceptor, the bank became primarily and directly liable to the payee/holder B. The recourse of the bank should be against X and its bookkeeper who conspired to make X's ledger show that he has sufficient funds.

D, being the drawer. INDORSER ACCEPTOR Indorser

Acceptor A person placing his signature upon an instrument otherwise than as maker or acceptor is deemed to be an indorser, unless he clearly indicates by appropriate words his intention to be bound in some other capacity (Sec. 63, NIL).

The acceptor, by accepting the instrument: 1. Engages that he will pay the NI according to the tenor of his acceptance; and 2. Admits the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument 3. Admits the existence of the payee and his then capacity to indorse (Sec. 62, NIL).

NOTE: A person who places his indorsement on an bearer instrument incurs all liabilities of an indorser (Sec. 67, NIL).

General indorser v. Irregular indorser (2005 Bar Question)

Party who can accept the bill of exchange GR: Only the drawee may accept. A stranger or volunteer is not bound by acceptance. XPN: In case of a bill which is accepted for honor supra protest (Sec. 161, NIL). NOTE: Drawee does not become liable until he accepts the instrument in which case he becomes an acceptor. An acceptor engages to pay according to the tenor of his acceptance, which may not be the same as the tenor of the bill itself because the acceptance may be qualified.

Difference between the liability of an acceptor or drawee-acceptor and a maker While both are primarily liable, the acceptor engages to pay the negotiable instrument according to the tenor of his acceptance. On the other hand, the UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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General Indorser Makes either a blank or special indorsement

Irregular Indorser Always makes a blank indorsement

Indorses the instrument after its delivery to the payee

Indorses before its delivery to the payee

Liable only to parties subsequent to him

Liable to the payee and subsequent parties unless he signs for the accommodation of the payee in which case he is liable only to all parties subsequent to the payee (Sec. 64, 66, NIL; De Leon, supra)

NEGOTIABLE INSTRUMENTS LAW NOTE: The holder or subsequent indorser who tries to claim under the instrument which had been dishonored for "irregular indorsement" must not be the irregular indorser himself who gave cause for the dishonor. (Gonzales v. Rizal Commercial Banking Corporation, 508 SCRA 459)

account of the depositor for his breach of warranty (Jai-Alai Corporation Of The Philippines v. BPI, G.R. No. L-29432, Aug. 6, 1975). Q: Phebean, the drawer issued a check to James. James, subsequently indorsed it to Trude. When Trude is about to encash the check, the drawee Union Bank refused to encash it due to insufficiency of funds. Trude sued James for payment of money. James alleged that the suit should be dismissed because Phebean is an indispensable party. Does James’ argument hold water?

Qualified indorser A qualified indorser is a person who indorses without recourse (Sec. 65, NIL). Drawer v. Indorser Drawer Party only to a bill Makes admission as to the existence of the payee and his capacity to indorse Makes no warranties, but engages to pay after certain conditions are complied with

Indorser Party either a bill or note No such admission

A: No, there is no privity between the drawer and the holder. The drawer is merely secondarily liable. As indorser, the buyer warranted that upon due presentment, the checks were to be accepted or paid, or both, according to their tenor, and that in case they were dishonored, she would pay the corresponding amount. After an instrument is dishonored by non-payment, indorsers cease to be merely secondarily liable; they become principal debtors whose liability becomes identical to that of the original obligor (Tuazon v. Heirs of Bartolome Ramos, G.R. No. 156262, July 14, 2005).

Has warranties

Order of liability among the indorsers

Q: X is the holder of an instrument payable to him (X) or his order, with Y as maker. X then indorsed it as follows: “Subject to no recourse, pay to Z. Signed, X.” When Z went to collect from Y, it turned out that Y's signature was forged. Z now sues X for collection. Will it prosper? (2011 Bar Question)

1. Among themselves – Liable prima facie in the order in which they indorse (Sec. 68) 2. To the holder – In any order NOTE: Every indorser is liable prima facie to all indorsers subsequent to him, but not those indorsers prior to him (Sec. 68, NIL)

A: Yes, because X, as a qualified indorser, warrants that the note is genuine.

Liability of an agent or broker who negotiates an instrument without indorsement

WARRANTIES

He incurs all the liabilities prescribed to a general indorser unless he discloses the name of his principal and the fact that he is acting only as an agent (Sec. 69, NIL)

The following are the warranties a person provides in negotiating an instrument: 1. That the instrument is genuine and in all respects what it purports to be 2. That he has good title to it 3. That all prior parties had capacity to contract 4. That he has no knowledge of any fact which would impair the validity of the instrument or render it useless.

NOTE: Parol evidence is NOT admissible to relieve an agent or broker whose endorsement brings him within the above liability.

Q: Can a collecting bank debit the account of the depositor when the checks indorsed to it (bank) were forged?

NOTE: Indorser’s liability as warrantor is distinct from his liability to pay the instrument. Even a qualified indorser may incur liability for breach of implied warranties. As warrantor, his liability is unconditional.

A: Yes, because the depositor of a check as indorser warrants that it is genuine and in all respect what it purports to be. Thus, when the checks deposited had forged indorsements and the collecting bank, as a consequence of such forgery, was made to pay the drawee bank, the collecting bank can debit the

45

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW PRESENTMENT FOR PAYMENT

3.

Presentment for payment It is the presentation of an instrument to the person primarily liable for the purpose of demanding and receiving payment.

Rule if the instrument is, by its terms, payable at a special place

Manner of presentment

If the instrument is, by its terms, payable at a special place, and the person primarily liable is able and willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part (Sec. 70, NIL).

GR: Instrument must be exhibited to the person from whom payment is demanded; when paid, it must be delivered to the person paying it (Sec. 74, NIL). XPNs: When exhibition is excused: 1. Debtor does not demand to see the instrument and refuses payment on some other grounds; or 2. Instrument is lost or destroyed.

Requisites for a sufficient presentment for payment Presentment for payment, to be sufficient, must be made: 1. By the holder, or his agent authorized to receive payment on his behalf; 2. At a reasonable hour on a business day; 3. At a proper place; 4. To the person primarily liable, or if he is absent or inaccessible, to any person found at the place where the presentment is made (Sec. 72, NIL).

Liability of a bank paying a certificate of deposit payable to bearer without requiring its surrender The bank remains liable to the holder if it certificate of deposit payable to bearer requiring its surrender (Far East Bank Company v. Querimit, G.R. No. 148582, 2002).

paid the without & Trust Jan. 16,

Time for presentment for payment

Payee cannot claim payment for a promissory note which was stolen and as such is not in his possession To make presentment for payment, it is necessary to exhibit the instrument, which he cannot do because he is not in possession thereof. NECESSITY OF PRESENTMENT FOR PAYMENT Instance when necessary

presentment

for

payment

When dispensed with under Sec. 82, NIL such as: a. Where, after the exercise of reasonable diligence, presentment cannot be made b. Where the drawee is a fictitious person c. By waiver of presentment, express or implied

INSTRUMENT

TIME FOR PRESENTMENT GR: On the day it falls due (Sec. 85, NIL)

Payable at a fixed or determinable future time

XPN: If the due date falls on a Saturday, presentment must be made on the next Monday.

is Promissory note payable on demand

Presentment for payment is only necessary to charge persons secondarily liable—drawer and indorsers (Sec. 70, NIL).

Within a reasonable time after its issue. Within a reasonable time after the last negotiation thereof (Sec. 71, NIL).

NOTE: Presentment for payment is not necessary in order to charge the person primarily liable on the instrument.

Instance when presentment for payment is not necessary to charge persons secondarily liable

Bill of exchange payable on demand

1. As to drawer, where he has no right to expect or require that the drawee or acceptor will pay the instrument (Sec. 79, NIL). 2. As to indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented (Sec. 80, NIL). UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

NOTE: If presentment for payment is made before maturity, it will not result to a discharge of the instrument (Sec. 50, NIL).

NOTE: “Last negotiation” means the last transfer for value. Subsequent transfers between banks for purposes of collection are not negotiations within Sec. 71. “Reasonable time” means not more than 6 months from the date of issue. Beyond said period, the check becomes stale and valueless and thus, should not be paid.

46

NEGOTIABLE INSTRUMENTS LAW NOTE: Every NI is payable at the time fixed therein without grace.

5.

Rules on presentment for payment when maturity date is fixed

Time of presentment where the instrument is payable at a bank

TIME OF MATURITY OF INSTRUMENT On a Sunday or holiday

Presentment 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 (Sec. 75, NIL.)

On a Saturday

If instrument which falls due on a Saturday is payable on demand

WHEN TO PRESENT FOR PAYMENT On the next succeeding business day On the next succeeding business day Before 12:00 noon on Saturday, or on Monday, at the option of the holder

Requisites of payment in due course Payment is made in due course when (MHG) 1. It is made at or after the date of Maturity; 2. To the Holder thereof; 3. In Good faith and without notice that holder’s title is defective (Sec. 88, NIL).

Instances when delay in making presentment is excused

NOTE: The term “in good faith” refers to the maker or acceptor and not to the holder.

1. When caused by circumstances beyond the control of the holder; and 2. Not imputable to his default, misconduct, or negligence (Sec. 81, NIL).

PARTIES TO WHOM PRESENTMENT FOR PAYMENT SHOULD BE MADE Parties to whom presentment for payment should be made

NOTE: Only the delay in presentment is excused and not the presentment itself. Hence, as soon as the cause of delay ceases to operate, presentment must be made with reasonable diligence (ibid.).

GR: Presentment for payment must be made to the primary party; to the: 1. The maker in case of a promissory note, or 2. The acceptor in case of an accepted bill. If the bill of exchange or check is payable on demand, the presentment must be made to the drawee although he is not automatically liable on the bill.

Q: Is the bank liable to the payee for depositing and encashing the crossed checks to an unauthorized person? A: Yes, the effects of crossing a check relate to the mode of its presentment for payment. Under Sec. 72 of the NIL, presentment for payment, to be sufficient, must be made by the holder or by some person authorized to receive on his behalf. The checks here had been crossed and issued “for payee’s account only.” This only signifies that the drawer had intended the same for deposit only by the person indicated (Associated Bank v. CA, G.R. No. 89802, May 7, 1992).

XPNs: Where the person/s primarily liable is/are: 1. Dead – payment must be made to his personal representative (Sec. 76, NIL). 2. Liable as partners and no place of payment specified – payment may be made to any of them though there has been a dissolution of the firm (Sec. 77, NIL). 3. Several persons, not partners, and no place of payment is specified – payment must be made to all of them (Sec. 78, NIL). 4. If the person primarily liable is absent or inaccessible, then presentment must be made to any person of sufficient discretion at the proper place of presentment (Sec. 72[d], NIL).

Order of preference with regard to the place of presentment 1. 2. 3. 4.

At his Last known place of business or residence (Sec. 73, NIL).

Specified place in the instrument Address of the person to make the payment if given in the instrument Usual place of business or residence of the person to make the payment Wherever he can be found; or

47

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW DISPENSATION WITH PRESENTMENT OF PAYMENT

NOTICE OF DISHONOR

Effect when presentment is not made

Notice of dishonor

GR: Drawer and the indorsers are discharged from their secondary liability.

It is a notice given by the holder to the parties secondarily liable, drawer and each indorser, that the instrument was dishonored by non-payment or non-acceptance by the drawee/maker.

XPNs: 1. Presentment for payment is not required to charge drawer and indorser when: a. Drawer- when he has no right to expect or require that the drawee or acceptor will pay the instrument (Sec. 79, NIL). b. Indorser – When the NI was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented (Sec. 80, NIL).

NOTE: Persons primarily liable need not be given notice of dishonor because they are the ones who dishonored the instrument.

Purposes for requiring notice of dishonor 1.

2.

2. When presentment for payment is dispensed with under Sec. 82, NIL 3. When the BOE has been dishonored by non-acceptance, since no PP for is necessary (Sec. 151, NIL).

Q: Notice of dishonor is not required to be made in all cases. One instance where such notice is not necessary is when the indorser is the one to whom the instrument is supposed to be presented for payment. The rationale here is that the indorser (2011 Bar Question)

Instances when presentment for payment may be dispensed with 1. 2. 3.

Where, after the exercise of reasonable diligence, presentment cannot be made; Where the drawee is a fictitious person; or By waiver of presentment, express or implied (Sec. 82, NIL).

A: Already knows of the dishonor and it makes no sense to notify him of it. Time and place of giving the notice of dishonor 1. GR: As soon as instrument was dishonored (Sec. 102, NIL.)–Party is allowed one entire day for the purpose of giving notice.

DISHONOR BY NON-PAYMENT Instances when an instrument is dishonored by non-payment NON-PAYMENT UPON DUE PRESENTATION The instrument is duly presented for payment to party primarily liable and it is either refused or cannot be obtained

XPN: Delay is excused (Sec. 113, NIL).

NON-PAYMENT W/OUT PRESENTATION Presentment is excused and the instrument is overdue and unpaid (Sec. 83, NIL).

NOTE: An instrument cannot be dishonored by non-payment until after the maturity.

2. Parties reside in the same place a. Place of business – Before close of business hours on the day following b. Residence – Before the usual hours of rest on the day following c. By mail – Deposited in the post office in time to reach him in the usual course on the day following (Sec. 103, NIL)

Effect of dishonor by non-payment Subject to the provisions of the law, when the instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder (Sec. 84, NIL).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

To inform parties secondarily liable that the maker or acceptor has failed to meet his engagement. To advise them that they are required to make payment.

3. Parties reside in different places a. By mail – Deposited in the post office in time to go by mail (actual departure in the course of mail from the post office in which the notice was deposited) the day following the day of dishonor.

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NEGOTIABLE INSTRUMENTS LAW b. If no mail – At a convenient hour (of the sender) on that day, by the next mail thereafter c. Other than by post office (e.g. personal messenger) – Within the time that notice would have been received in due course of mail, if it has been deposited in the post office within the time specified in (a) (Sec. 104, NIL).

6. 7.

Parties to whom the notice of dishonor should be given in case the instrument was dishonored in the hands of the agent

4. Time of notice to antecedent parties – Same time for giving notice that the holder has after the dishonor (Sec. 107, NIL).

1. To the parties secondarily liable – Within the time fixed by Secs. 102-104, and 107, otherwise, they are discharged 2. To his principal – The principal must give notice to parties secondarily liable as if his agent were an independent holder (Sec. 94, NIL).

NOTE: Actual receipt of the party within the time specified by law is sufficient though not sent in the places specified above (Sec. 108, NIL).

Instances when a negotiable considered dishonored

instrument

Notice to joint parties who are not partners must be given to each of them (Sec. 100, NIL) Where a party has been adjudged a bankrupt – to the party himself or to his trustee or assignee (Sec. 101, NIL)

is

NOTE: A party who receives notice of dishonor is entitled to give notice of such dishonor to prior parties within the same period of time that the holder has after the dishonor, as if he were the said holder (Sec. 107, NIL).

A. For BOE, 1. If not accepted when presented for acceptance; or 2. If presentment for acceptance is excused and the bill is not accepted (Sec. 149, NIL).

PARTIES WHO MAY GIVE NOTICE OF DISHONOR 1. 2. 3.

B. For PN, 1. Not paid (that is, payment is refused or not obtained) when presented for payment at maturity; or 2. Where presentment is excused or waived and the instrument is overdue and unpaid (Sec. 83, NIL).

Holder Another in behalf of the holder Any party to the instrument, who may be compelled to pay and who, upon taking it up, would have a right to reimbursement from the party to whom notice is given (Sec. 90, NIL) EFFECT OF NOTICE

Liability of a person secondarily liable when the instrument is dishonored

Effect of notice of dishonor if given by or on behalf of the holder

After the necessary proceedings for dishonor had been duly taken, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder (Sec. 84).

Notice of dishonor inures to the benefit of: 1. All holders subsequent to the holder who has given notice; and 2. All parties prior to the holder but subsequent to the party to whom notice has been given and against whom they may have a right of recourse (Sec. 92, NIL)

PARTIES TO BE NOTIFIED Parties to whom notice must be given

Effect of notice of dishonor if given by party entitled thereto

Notice of dishonor should be given to: 1. The drawer; or 2. Indorser; or 3. His agent (Sec. 97, NIL) 4. Where party is dead – to a personal representative or sent to the last residence or last place of business of the deceased (Sec. 98, NIL) 5. When the parties to be notified are partners – notice to any one partner though there has been a dissolution (Sec. 99, NIL)

Notice of dishonor inures to the benefit of: 1. The holder; and 2. All parties subsequent to the party to whom notice is given (Sec. 93, NIL). Effect of failure to give notice of dishonor Any drawer or indorser to whom such notice is not given is discharged (Sec. 89, NIL)

49

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW NOTE: Holder is not required to notify all indorsers, he may select to hold only one or more indorsers. Indorsers who are discharged from liability by reason that no notice of dishonor was given to them is still liable for breach of warranties as to the NI.

2.

Particular indorser (if written above the signature of such indorser) (Sec. 110, NIL).

Waiver of protest It is the waiver of the formal instrument executed usually by a notary public certifying that the legal steps necessary to fix the liability of the drawee and the indorsers have been taken. Thus, it is deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor (Sec. 111, NIL).

FORM OF NOTICE Form and contents of a notice of dishonor 1. 2. 3.

Oral; or In writing It may be given by personal delivery, or by mail (Sec. 96, NIL) 4. Must contain the following: a. Description of the instrument; b. Statement that it has been presented for payment or for acceptance and that it has been dishonored (If protest is necessary, notice must also contain a statement that it has been protested). c. Statement that the party giving the notice intends to look for the party addressed for payment.

DISPENSATION WITH NOTICE Instances when notice of dishonor is not necessary 1. Waiver of notice (Sec. 109, NIL) 2. Waiver of protest (Sec. 111, NIL) 3. When notice is dispensed with when after exercise of reasonable diligence, notice cannot be given or does not reach the parties sought to be charged (Sec. 112, NIL) 4. Drawer in cases under Sec. 114, NIL. 5. Indorser in cases under Sec. 115, NIL.; and 6. Where due notice of dishonor by non-acceptance has been given (notice of dishonor by non-payment not necessary). (Sec. 116, NIL.)

NOTE: A written notice need not be signed, and an insufficient notice may be supplemented or validated by verbal communication. A misdescription of the instrument does not vitiate the notice unless the party to whom the notice is given is in fact misled thereby (Sec. 95, NIL).

Instances when a notice of dishonor to the drawer may be dispensed with

WAIVER 1. When drawer and drawee is the same person 2. Drawee is fictitious or does not have the capacity to contract 3. Drawer is the person to whom the instrument is presented for payment (he is the one who dishonored the instrument) 4. Drawer has no right to expect or require that the drawee or acceptor will honor the instrument. 5. Drawer has countermanded the payment (e.g. stop payment order) (Sec. 114, NIL.)

Waiver of notice It is the willingness on the part of the drawer or indorser to be bound as such even without due notice of dishonor. Time when a waiver of notice may be given 1. 2.

Before the time of giving notice has arrived; or After the omission to give due notice (Sec. 109,NIL).

NOTE: The holder of two checks which were dishonored because the drawer withdrew her funds from the bank can hold the drawer liable even if no notice of dishonor was given to the drawer, since the drawer had no right to expect that the drawee bank would honor the checks. (State Investment House, Inc. vs. Court of Appeals, 217 SCRA 32)

Ways to give a waiver of notice It can either be: 1. Express; or 2. Implied (e.g. Payment by an indorser after he learns of the default of the maker; admission of liability after dishonor) (Sec. 109, NIL).

Q: P authorized A to sign a negotiable instrument in his (P’s) name. It reads: “Pay to B or order the sum of Php1 million. Signed, A (for and in behalf of P).” The instrument shows that it was drawn on P. B then indorsed to C, C to D, and D to E. E then treated it as a bill of exchange. Is presentment for

Parties affected by the waiver of notice 1.

All parties (if embodied on the face of the instrument); or UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

50

NEGOTIABLE INSTRUMENTS LAW acceptance necessary in this case? (2011 Bar Question)

Effect of lack of notice of dishonor on the instrument which is payable in installments

A: No, since the drawer and drawee are the same person.

1. No acceleration clause – Failure to give notice of dishonor on a previous installment does not discharge drawers and indorsers as to succeeding installments.

Q: Juben issued to Y two post-dated checks as security for pieces of jewelry to be sold. Y negotiated the check to S. When Juben failed to sell the jewelry, he withdrew all his funds from the drawee bank. After dishonor, Juben contends that the holder failed to give him a notice of dishonor. Is notice of dishonor necessary?

2. With acceleration clause – It depends upon whether the clause is automatic or optional. a. Automatic – failure to give notice of dishonor as to a previous installment will discharge the persons secondarily liable as to the succeeding installments; b. Optional – if not exercised, the rule would be the same as if there is no acceleration clause. If exercised, the rule would be the same as if the installment contains an automatic acceleration clause (Town Savings Bank v. CA, G.R. No. 106011, June 17, 1993).

A: No, Juben was responsible for the dishonor of his checks, hence, there was no need to serve him notice of dishonor (State Investment House, Inc. v. CA, G.R. No. 101163, Jan. 11, 1993). Instances when it is not necessary to give a notice of dishonor to the indorser 1.

2. 3.

DISCHARGE OF NEGOTIABLE INSTRUMENT

Drawee is fictitious or has no capacity to contract, and indorser was aware of these facts at the time he indorsed the instrument; Indorser is person to whom the instrument is presented for payment; or Instrument was made or accepted for his accommodation (Sec. 115, NIL).

It is the 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. DISCHARGE OF NEGOTIABLE INSTRUMENT Methods for discharge of instrument

EFFECT OF FAILURE TO GIVE NOTICE

1. Payment by principal debtor: a. By or on behalf of principal debtor b. At or after its maturity c. To the holder thereof d. In good faith and without notice that the holder’s title is defective 2. Payment by accommodated party 3. Intentional cancellation of instrument by the holder (by expressly stating it in the instrument or when the instrument is torn up, burned or destroyed) 4. Any act which discharges a simple contract for the payment of money under Art. 1231 of the NCC specifically remission, novation, and merger.

Effect of the omission of a previous holder to give notice of dishonor by non-acceptance It does not prejudice the rights of a holder in due course subsequent to the omission to present the instrument to the drawee for acceptance and notify the drawer and indorsers if acceptance is refused (Sec. 117, NIL). Effect of failure to give notice of dishonor GR: Any person to whom such notice is not given is discharged, but he will still be liable for breach of warranties pertaining to the instrument.

NOTE: Loss of the negotiable instrument will not extinguish liability; compensation is not available so long as an obligation is evidenced by a negotiable instrument (Commercial Law Review, Villanueva, 2009 Edition).

XPNs: 1. Waiver (Sec. 109, NIL) 2. Notice is dispensed with (Sec. 112, NIL) 3. Not necessary to drawer (Sec. 114, NIL) 4. Not necessary to indorser (Sec. 115, NIL)

5. Reacquisition by principal debtor in his own right. Reacquisition must be: a. By the principal debtor b. In his own right

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW c. At or after date of maturity (instrument is discharged; if made before, it may be renegotiated) (Sec. 119, NIL).

subsequent indorsements, and again negotiate the instrument. XPNs: 1. Where it is payable to the order of a third person, and has been paid by the drawee; and 2. It was made or accepted for accommodation, and has been paid by the party accommodated.

DISCHARGE OF PARTIES SECONDARILY LIABLE Methods of discharge of secondary parties (ACS TReE) 1. 2. 3. 4. 5.

6.

Any Act which discharges the instrument; Intentional Cancellation of his signature by the holder Discharge of prior party which may be made when signature is Stricken out Valid Tender of payment by a prior party; Release of the principal debtor, unless holder expressly reserves his right of recourse against the said subsequent parties Extension of time of payment, unless: a. Extension is consented to by such party b. Holder expressly reserves his right of recourse against such party (Sec. 120, NIL)

RENUNCIATION BY HOLDER Renunciation It is the act of surrendering a claim or right with or without recompense (a PERSONAL defense). Manner of making renunciation by the holder 1. 2.

Must be written If oral, the instrument must be surrendered to the person primarily liable (Sec. 122, NIL).

Effects of renunciation Q: The rule is that the intentional cancellation of a person secondarily liable results in the discharge of the latter. With respect to an indorser, the holder's right to cancel his signature is: (2011 Bar Question)

1. Made in favor of principal debtor made at or after the maturity (made absolutely and unconditionally) of the instrument – discharges the instrument (Sec. 122, NIL). 2. Made in favor of a secondary party may be made by the holder before, at or after maturity – discharges only the secondary parties and all subsequent to him (Sec. 122, NIL). 3. Renunciation does not affect the rights of a holder in due course without notice (Sec. 120, NIL)

A: Limited to the case where the indorsement is not necessary to his title. Effects of payment by persons secondarily liable 1. Instrument is not discharged 2. It only cancels his own liability and that of the parties subsequent to him 3.

Rule regarding the cancellation of an instrument

GR: Instrument may be renegotiated

It is presumed intentional. It is inoperative if unintentional, or under a mistake or without the authority of the holder. But where an instrument or any signature appears to have been cancelled, the burden of proof lies on the party alleging that the cancellation was made unintentionally, or under a mistake or without authority (Sec. 123, NIL).

XPNs: a. Where it is payable to the order of a third person, and has been paid by the drawer; and b. Where it is paid by the accommodated party NOTE: (a) and (b) has the same effect as payment by the party primarily liable.

4. Person paying is remitted to his former rights (as regards prior parties) and he may strike out his own and all subsequent indorsements (Sec. 121, NIL). RIGHTS OF A PARTY WHO DISCHARGED THE INSTRUMENT GR: The party so discharging the instrument is remitted to his former rights as regards all prior parties, and he may strike out his own and all UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

52

NEGOTIABLE INSTRUMENTS LAW MATERIAL ALTERATION

Q: Can a drawee who accepts a materially altered check recover from the holder and the drawer? (2011 Bar Question)

CONCEPT Material alteration

A: No, he cannot recover from either of them.

It is any change in the instrument which affects or changes the liability of the parties in any way.

There is no material alteration when the serial number of a check had been altered

Instances that constitute material alteration Any alteration which changes: 1. Date 2. Sum payable, either for principal or interest 3. The time or place of payment 4. Number or the relations of the parties 5. Currency in which payment is to be made 6. Adds a place of payment where no place is specified 7. Any other change or addition which alters the effect of the instrument (Sec. 125, NIL.)

An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party. The alteration of the serial number of a check did not change the relations between the parties nor the effect of the instrument. Hence, the alteration on the serial number of a check is not a material alteration (International Corporate Bank vs. CA, G.R. No. 141968, Feb. 12, 2001).

NOTE: The change in the date of indorsement is not material where the date is not necessary to fix the maturity of the instrument.

Q: A material alteration of an instrument without the assent of all parties liable thereon results in its avoidance, except against: (2011 Bar Question)

Spoliation

A: A party who has made, authorized or assented to the alteration and subsequent indorser.

It refers to material alteration of an instrument done by a stranger. It has the same effect as alteration.

ACCEPTANCE

EFFECT OF MATERIAL ALTERATION

DEFINITION

Effect of material alteration of a negotiable instrument without the assent of all parties liable thereon

Acceptance of a bill It is a signification by the drawee of his assent to the order of the drawer (Sec. 132, NIL).

1.

Avoids the instrument except against: a. A party who has made the alteration; b. A party who authorized or assented to the alteration; or c. The indorsers who indorsed subsequent to the alteration (because of their warranties). 2. If negotiated to a HIDC, he may enforce the payment thereof according to its original tenor against the person not a party to the alteration. He may also enforce payment thereof against the party responsible for the alteration for the altered amount. 3. If negotiated to a holder not a HIDC, he cannot enforce payment against the person not a party prior to the alteration. He may, however enforce payment according to the altered tenor from the person who caused the alteration and from the indorsers (Sec. 124 NIL)

Requisites for acceptance 1. In writing, except constructive acceptance and to a foreign bill payable in another state (unless the other state requires for written acceptance); 2. Signed by the drawee (without it, he is not liable); 3. Must express a promise to pay money (not goods); 4. Delivered to the holder (before delivery or notification, acceptor may revoke or cancel his acceptance). Effect of acceptance Upon acceptance, the bill, in effect becomes a note. The drawee who thereby becomes an acceptor assumes the liability of the maker (who has primary liability) and the drawer, that of the first indorser.

53

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Q: A bill of exchange states on its face: “One (1) month after sight, pay to the order of Mr. R the amount of Php50,000.00, chargeable to the account of Mr. S. Signed, Mr. T.” Mr. S, the drawee, accepted the bill upon presentment by writing on it the words “I shall pay Php30,000.00 three (3) months after sight.” May he accept under such terms, which varies the command in the bill of exchange? (2011 Bar Question)

Kinds of qualified acceptance 1. Conditional – makes payment by the acceptor dependent on the fulfillment of a condition therein stated. 2. Partial – an acceptance to pay part only of the amount for which the bill is drawn. 3. Local – an acceptance to pay only at a particular place. 4. Qualified as to time– a bill is accepted to be paid on or after a specified date. 5. As to drawee - acceptance of some one or more of the drawees but not of all (Sec. 141, NIL).

A: Yes, since a drawee is allowed to effect a qualified acceptance in which case he shall be liable according to the tenor of his acceptance. Q: X, drawee of a bill of exchange, wrote the words: “Accepted, with promise to make payment within two days. Signed, X.” The drawer questioned the acceptance as invalid. Is the acceptance valid?

Other kinds of acceptance 1. Constructive/implied (Sec. 137, NIL). a. Drawee to whom the bill is delivered for acceptance destroys it; or b. Drawee refuses, within 24 hours after such delivery, or within such time as is given him, to return the bill accepted or non-accepted 2. Extrinsic– the acceptance is written on a paper other than the bill itself. To be binding upon the acceptor: a. Acceptance must be shown to the person to whom the instrument is negotiated; and b. Such person must take the bill for value on the faith of such acceptance (Sec. 134, NIL). 3. Virtual a. Unconditional promise in writing to accept a bill b. Promise made before it is drawn c. Any person who, upon faith thereof, receives the bill for value (Sec. 135, NIL).

A: Yes, because the acceptance is in reality a clear assent to the order of the drawer to pay. Qualified acceptance as to time is allowed (Sec. 141 [d], NIL). MANNER Manner of making an acceptance Acceptance may be made 1. On the bill itself, 2. On a separate paper; and if on a separate paper a. It may be acceptance as to an existing bill; or b. it may be acceptance as to a non-existing bill. If the bill is non-existent, the acceptance on a separate paper must comply with following requirements: 1. The contemplated drawee shall describe the bill to be drawn and promise to accept it. 2. Bill shall be drawn within a reasonable time after such promise is written; and 3. The holder shall take the bill upon the credit of the promise.

TIME FOR ACCEPTANCE The drawer has 24 hours after presentment to decide whether or not he will accept the bill. The acceptance, if given, dates as of the day of presentation (Sec. 136, NIL). NOTE: Drawee bank is not entitled to 24 hours to decide whether or not to pay a check since a check is presented for payment, not acceptance.

Kinds of acceptance 1. General Acceptance - It assents without qualification to the order of the drawer (Sec. 139, NIL). 2. Qualified Acceptance - An acceptance which in express terms varies the effect of the bill as drawn (ibid.).

RULES GOVERNING ACCEPTANCE Effect of accepting an instrument with a qualified acceptance GR: When the holder takes a qualified acceptance the drawer and indorsers are discharged from liability on the bill.

NOTE: A holder may refuse to accept a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance (Sec. 142, NIL).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

NOTE: The holder may refuse to take a qualified acceptance and if he does not obtain an unqualified acceptance, he

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NEGOTIABLE INSTRUMENTS LAW may treat the bill as dishonored by non-acceptance (Sudiang, 2014).

3. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee (par. 1, Sec. 143, NIL).

XPNs: 1. When they have expressly or impliedly authorized the holder to take a qualified acceptance, or 2. Subsequently assent thereto 3. Implied assent (when they did not express their dissent to the holder within a reasonable time when they received a notice of qualified acceptance) (Sec. 142, NIL)

NOTE: The holder must either present it for acceptance or negotiate it within a reasonable time, otherwise, the drawer and all indorsers are discharged (Sec. 144, NIL).

TIME/PLACE/MANNER OF PRESENTMENT Proper presentment for acceptance

NOTE: When the drawer or indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto (Sundiang, 2014).

It must be made: 1. By or on behalf of the holder 2. At a reasonable hour on a business day 3. Before the bill is overdue; and 4. To the drawee or some person authorized to accept or refuse to accept on his behalf (Sec. 145, NIL).

Acceptance of an incomplete bill Acceptance may be made before the bill has been signed by the drawer or while otherwise incomplete, or after it is overdue, or even after it has been dishonored by non-acceptance or non-payment (Sec. 138, NIL)

WHEN Bill addressed to 2 or more drawees who are not partners

Effect of the certification by the drawee bank Certification implies that the check is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction and that they shall be so applied whenever the check is presented for payment. Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance (Secs. 187, 189, NIL; New Pacific Timber v. Seneris, G.R. No. L-41764, Dec. 19, 1980).

Drawee is dead

PRESENTMENT MUST BE MADE TO All of them unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only (Sec. 145, [a], NIL). Drawee's personal representative (Sec. 145, [b], NIL). NOTE: Presentment is merely permissive since it is excused by (Sec.148a).

Drawee is adjudged a bankrupt or insolvent or has made an assignment for the benefit of creditors

PRESENTMENT FOR ACCEPTANCE Presentment for acceptance It is the production or exhibition of a bill of exchange to the drawee for his acceptance or payment (also includes presentment for payment). Necessity of presentment for acceptance

To drawee or his trustee/assignee (Sec 145, [c], NIL).

EFFECT OF FAILURE TO MAKE PRESENTMENT

GR: It is not necessary to render any party to the bill liable (par. 2, Sec. 143, NIL).

Effect of failure to make presentment for payment of a check within a reasonable time

XPNs: 1. Where bill is payable after sight, or when it is necessary in order to fix the maturity of the instrument 2. When bill expressly stipulates that it shall be presented for acceptance; or

Failure to make such presentment will discharge the drawer from liability or to the extent of the loss caused by the delay (Sec. 186, NIL; Republic of the Philippines vs. PNB, G.R. No. L-16106, December 30, 1961).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Instance when delay in presentment may be excused

Rights of a holder when bill is not accepted When a bill is dishonored by non-acceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder, and no presentment for payment is necessary (Sec. 151, NIL).

Where the holder of a bill drawn payable elsewhere than at the place of business or the residence of the drawee has no time with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for payment on the day that it falls due (Sec. 147, NIL).

Acceptance for honor It is an undertaking by a stranger to a bill after protest for the benefit of any party liable thereon or for the honor of the person for whose account the bill is drawn which acceptance inures to the benefit of all parties subsequent to the person for whose honor it is accepted, and conditioned to pay the bill when it becomes due if the original drawee does not pay it (Sec. 161, NIL).

Instances when presentment is excused 1. Where the drawee is dead, or has absconded, or is a fictitious person not having capacity to contract by bill; 2. Where, after exercise of reasonable diligence, presentment cannot be made; or 3. Where, although presentment has been irregular, acceptance has been refused on some other ground (Sec. 148, NIL).

Requisites of acceptance for honor (WIS) 1. Must be in Writing 2. Must Indicate that it is an acceptance for honor 3. Must be Signed by the acceptor for honor (Sec. 162, NIL)

DISHONOR BY NON-ACCEPTENCE Instances when non-acceptance

a

bill

is

dishonored

by

PROMISSORY NOTES 1. When it is duly presented for acceptance and such an acceptance is refused or cannot be obtained; or 2. When presentment for acceptance is excused, and the bill is not accepted (Sec. 149, NIL).

Promissory note

NOTE: It is not sufficient that presentment for acceptance is excused, it is also necessary that the bill remains not accepted.

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 (Sec. 184, NIL).

Duty of the holder where bill is not accepted

Special types of promissory notes

If within 24 hours after due presentment, the bill is not accepted, the person presenting it must treat the bill as dishonored by non-acceptance otherwise he will lose the right of recourse against the drawer and indorsers (Sec. 150, NIL).

1. Certificate of deposit – a written acknowledgment by a bank of the receipt of money on deposit on which the bank promises to pay to the depositor or to him or his order or to some other person or to him or his order, or to a specified person or bearer, on demand or on a fixed date, often with interest. 2. Bonds – an evidence of indebtedness issued by a public or private corporation which constitutes a promise, under seal, to pay money. It runs for a longer period of time than a PN. 3. Registered bond – one payable only to the person whose name appears on the face of the certificate. 4. Coupon bond – one to which are attached coupons which entitle the holder to interest when due. 5. Bank Note – instrument issued by a bank for circulation as money payable to bearer on demand.

Rules when a bill is dishonored by non-acceptance 1. Right of recourse against all secondary party accrues to the holder. 2. No presentment for payment is necessary since dishonor of the instrument by non-payment is to be expected. 3. If the instrument is accepted after it has been dishonored by non-acceptance, presentment for payment is necessary upon maturity. 4. In case of non-payment, holder must give the corresponding notice of dishonor; otherwise, secondary parties are discharged.

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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NEGOTIABLE INSTRUMENTS LAW 6. Due Bill - PN which shows on its face that one person acknowledges his indebtedness to another. The word “due” is commonly used. 7. Mortgage Note – an instrument secured by either a real (REM) or personal property (Chattel). 8. Title-retaining Note – an instrument used to secure the purchase price of goods. It ordinarily provides that title to the goods shall remain in payee’s name until the note is paid in full. 9. Collateral Note – it is used when the maker pledges securities to the payee to secure the payment of the amount of the note 10. Judgment Note – this is a note to which a power of attorney is added enabling the payee to take judgment against the maker without the formality of a trial if the note is not paid on its due date (De Leon, supra).

Check v. Bill of exchange

Drawee

Payability

Function

Instances when a bill of exchange may be treated as a promissory note 1. 2. 3. 4.

Presentment for Payment

The drawer and the drawee are the same person; The drawee is a fictitious person; The drawee has no capacity to contract; The instrument is so ambiguous that there is doubt whether it is a bill or a note (Sundiang 2014, citing Secs. 17[e] and 130, NIL).

Discharge of Liability

CHECKS DEFINITION

Check It is a bill of exchange drawn on a bank and payable on demand (Sec. 185, NIL).

Effect of the Death of the Drawer

NOTE: 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.

Essential characteristics of checks There are 2 essential distinct characteristics of checks: 1. They are drawn on a bank; and 2. Payable instantly on demand.

Presentment for Acceptance

Checks Always drawn on a bank or banker against a previous deposit of funds Always payable on demand

Ordinarily intended for immediate payment Must be presented for payment within a reasonable time after its issue(Sec.186, NIL) When a check is accepted or certified, the drawer & indorsers are discharged from liability thereon (Sec. 188, NIL) Death of the drawer of a check with the knowledge of the bank revokes the authority of the bank to pay. Need not be presented for acceptance (Sec. 185, NIL.)

BOE May or may not be drawn on a bank and need not be drawn against a deposit Either payable on demand or at a fixed or determinable future time (Sec.4) Intended for circulation as instrument of credit Must be presented for payment within a reasonable time after its last negotiation (Sec. 171, NIL) They remain liable despite acceptance (Sec. 84, NIL)

Death of the drawer of an ordinary bill does not revoke the authority of the drawee to pay.

Must be presented for acceptance in certain cases (Sec. 143, NIL.)

Q: A check was dishonored due to material alteration. The creditor then filed an action against drawee bank for the amount. Will the action prosper?

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW A: No. If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the payee-holder cannot, as provided under Sections 185 and 189 of the NIL, sue the bank. The payee should instead sue the drawer who might in turn sue the bank. This is so because no privity of contract exists between the drawee-bank and the payee (Villanueva v. Nite, G.R. No. 148211, July 25, 2006).

Q: What is a crossed check? What are the effects of crossing a check? Explain. (2005 Bar Question) A: A crossed check is a check with two (2) parallel lines, written diagonally on the upper right corner thereof. It is a warning to the drawee bank that payment must be made to the right party; otherwise the bank has no authority to use the drawer's funds deposited with the bank.

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

To be assured that it will avoid any mistake in paying to the wrong party, banks adopted the policy that crossed checks must be deposited in the payee's account. When withdrawal is made, the banks can be sure that they are paying to the right party. The crossing becomes a warning also to whoever deals with the said instrument to inquire as to the purpose of its issuance. Otherwise, if something wrong happens to the payment thereof, that person cannot claim to be a holder in due course. Hence, he is subject to the personal defense on the part of the drawer that there is breach of trust committed by the payee in not complying with the drawer's instruction.

Stopping payment The drawer has the right to order the drawee to stop payment of a check and this right flows from the rule that the issuance of a check by itself is not an assignment of funds by the drawee. If a bank pays a check after it has been notified to stop payment, it pays in its own responsibility and will not be permitted to charge the account. The drawer may countermand payment if he has a valid defense against the holder of the check. Thus, countermanding of a check is proper where the payee failed to deliver the goods that he was supposed to deliver (Sundiang 2014, citing Bataan Cigar and Cigarette Factory v. CA).

Hence, the effects of crossing a check are: 1. That the check may not be encashed but only deposited in the bank; 2. That the check may be negotiated only once- to one who has an account with a bank; 3. That the act of crossing the check serves as a warning to the holder that the check has been issued for definite purpose so that he must inquire if he has received the check pursuant to the purpose. Otherwise, he is not a HIDC (State Investment House v. IAC, 175 SCRA 310).

KINDS Special types of checks 1. Cashier’s Check – a BOE drawn by the bank upon itself and is accepted at its issuance. It is usually signed by the cashier of the bank. 2. Manager’s Check – a BOE drawn by the bank upon itself and is accepted at its issuance and signed by a manager on behalf of a bank. 3. Certified Check – Drawn by a depositor upon funds to his credit in a bank which an officer of a bank certifies will be paid on presentation. 4. Crossed Check – Done by writing 2 parallel lines on the left top portion of the check. The marking signifies that the bank should pay only with the intervention of the company only. 5. Memorandum Check – A check with “Memorandum” written on its face. The writing signifies that the drawer engages to pay the bona fide holder absolutely, without any condition concerning its presentment 6. Traveler’s Checks – Instruments purchased from banks or express companies which can be used like cash upon the second signature by the purchaser (De Leon, supra, pg. 380-385).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Purpose of crossing a check The purpose is to insure payment to the payee. It can only be deposited but may not be converted into cash by the drawer. Crossing a check does not destroy its negotiability but the check may be negotiated only once – to one who has an account with the bank (De Ocampo v. Gatchalian, 3 SCRA 596). Stale check A check which has not been presented for payment within a reasonable time after its issue. It is valueless and thus, should not be paid. A check becomes stale 6 months from date of issue.

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NEGOTIABLE INSTRUMENTS LAW When drawer of check discharged from liability (a) The check is not presented within a reasonable time after its issue; (b) The drawer suffers loss; and (c) The loss suffered by the drawer is attributable to the delay (De Leon, 2010 p. 406) Memorandum check A memorandum check is an evidence of debt against the drawer and although may not be intended to be presented, has the same effect as an ordinary check and if passed on to a third person, will be valid in his hands like any other check (People v. Nitafan, G.R. No. 75954, Oct. 22, 1992). PRESENTMENT FOR PAYMENT TIME Time A check must be presented for payment within a reasonable time after its issue (Sec. 186, NIL). EFFECTS OF DELAY Effects of delay 1. The drawer will be discharged from liability thereon to the extent of the loss caused by the delay. (ibid.) 2. The indorser shall be discharged from liability (PNB vs. Seeto, G.R. No. L-4388, August 13, 1952). NOTE: PP is not dispensed with by Sec. 186 of the NIL. Hence, if there is no PP, the drawer cannot be held irrespective of the loss or injury suffered by the payee (Pio Barretto Realty Corp. v. CA, G.R. No. 132362, June 28, 2001).

Q: When will the delivery of a check produce the effect of payment even if the same had not been encashed? A: If the debtor was prejudiced by the creditor's unreasonable delay in presentment. Acceptance of a check implies an undertaking of due diligence in presenting it for payment. If no such presentment was made, the drawer cannot be held liable irrespective of loss or injury sustained by the payee. Payment will be deemed effected and the obligation for which the check was given as conditional payment will be discharged (Pio Barretto Realty Corp. v. CA, supra).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Insurance as a uberrimae Fidei contract

INSURANCE LAW

The contract of insurance is one of perfect good faith (uberrimae fidei) 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 (Qua Chee Gan vs. Law Union and Rock Insurance, Co. Ltd., GR No. L-4611, December 17, 1955). It requires the parties to the contract to communicate that which a party knows and ought to communicate, that is, the duty to disclose in good faith all facts material to the contract. This doctrine is essential on account of the fact that the full circumstances of the subject matter of insurance are, as a rule, known to the insured only and the insurer, in deciding whether or not to accept a risk, must rely primarily upon the information supplied to him by the applicant (Sundiang, 2014).

Laws governing contracts of insurance in the Philippines 1. 2. 3.

R.A. 10607 New Civil Code Special Laws CONCEPT OF INSURANCE

Contract of insurance It is an agreement whereby one undertakes for a consideration to indemnify another against the loss, damage or liability arising from an unknown or contingent event (Sec. 2[a], Insurance Code).

Insurance as contracts of adhesion (Fine Print Rule)

NOTE: A contract of insurance, to be binding from the date of application, must have been a completed contract (Perez vs. CA, GR No. 112329, January 28, 2000). Thus, it must have all the essential elements of a valid contract as enumerated in Art. 1318 of the New Civil Code: 1. Subject matter in which the insured has an insurable interest; 2. Consideration, which is the premium paid by the insured, for the insurer’s promise to indemnify the former upon the happening of the event or peril insured against; 3. Meeting of minds of the parties.

While generally, stipulations in a contract come about after deliberate drafting by the parties thereto, there are certain contracts almost all the provisions of which have been drafted only by one party, usually a corporation. Such contracts are called contracts of adhesion, because the only participation of the other party is the signing of his signature or his 'adhesion' thereto. Insurance contracts fall into this category (Sweet Lines, Inc. vs. Teves, GR No. L-37750, May 19, 1978). An illustration of a contract of adhesion is when the insurer used “fine print” letters in conditions stated in a contract of insurance (Ibid).

“Doing an insurance business” or “transacting an insurance business” The term “doing an insurance business” or “transacting an insurance business” means: (ISRA) 1. Making or proposing to make, as Insurer, any insurance contract; 2. Making or proposing to make, as Surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; 3. Doing any kind of business, including a reinsurance business, specifically Recognized as constituting the doing of an insurance business. 4. Doing or proposing to do any business in substance equivalent to Any of the foregoing in a manner designed to evade the provisions of the Insurance Code.(Sec. 2[b], ibid).

Rules in the construction or interpretation of insurance contracts By reason of the exclusive control of the insurance company over the terms and phraseology of the contract, the ambiguity must be held strictly against the insurer and liberally in favor of the insured (Qua Chee Gan v Law Union and Rock Insurance, supra). However, if the terms, which the parties themselves have used, are clear and unambiguous, they must be taken and understood in their plain, ordinary and popular sense (Sun Life Office, Ltd. vs. CA, 195 SCRA 193). Parties to the contract of insurance

NOTE: In the application of the provisions of the Insurance Code, the fact that no profit is derived from the making of the insurance contracts, agreements or transactions or that no separate or direct consideration is received therefor, shall NOT be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business (Ibid).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

1. Insurer – party who assumes or accepts the risk of loss and undertakes for a consideration to indemnify the insured on the happening of a specified contingency or event.

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INSURANCE CODE 2. Insured – person in whose favor the contract is operative and is indemnified.

A: HMOs are not insurance business. One test that they have applied is whether the assumption of risk and indemnification of loss (which are elements of an insurance business) are the principal object and purpose of the organization or whether they are merely incidental to its business. If these are the principal objectives, the business is that of insurance. But if they are merely incidental and service is the principal purpose, then the business is not insurance.

NOTE: The insured is not always the person to whom the proceeds are paid.

3. Assured/Beneficiary- a person designated by the terms of the policy to receive the proceeds of the insurance. He may be the insured or a third party in the contract for whose benefit the policy is issued and to whom the loss is payable.

Philippine Health Care Providers appears to provide insurance-type benefits to its members (with respect to its curative medical services), but these are incidental to the principal activity of providing them medical care. The "insurance-like" aspect of Philippine Health Care Providers’ business is miniscule compared to its noninsurance activities. Therefore, since it substantially provides health care services rather than insurance services, it cannot be considered as being in the insurance business (Philippine Health Care Providers, Inc., v. Commissioner Of Internal Revenue, G.R. No. 167330, September 18, 2009).

Insurer Every corporation, partnership, or association duly authorized (by the Insurance Commission) to transact insurance business may be an insurer (Sec. 6, Insurance Code, as amended by RA 10607). NOTE: The term “insurer” no longer includes “individuals” under RA 10607. Hence, an individual natural person is no longer allowed to be an insurer. However, it includes the following: 1. “Professional reinsurer” as any person, partnership, association or corporation that transacts solely and exclusively reinsurance business in the Philippines. 2. “Mutual Insurance Companies” are also included. The law also provides for the procedure for mutualization of domestic stock life insurance companies. A new provision on RA 10607 is on demutualization or conversion of mutual insurance companies into stock corporations (Sec. 280, Insurance Code, as amended). 3. Cooperatives are now expressly included in the term “insurer” or “insurance company.” However, the cooperative must: a. Have a sufficient capital and asset required under the Insurance Code and the pertinent regulations issued by the Commission (Sec. 192, Insurance Code, as amended). b. Have a certificate of authority to operate issued by the Commission which should be renewed every year (Sec. 193, Insurance Code, as amended) (Sundiang, 2014).

Persons who may be insured Anyone except a public enemy may be insured (Sec. 7, Insurance Code). NOTE: A public enemy is a nation at war with the Philippines and every citizen or subject of such nation. It does not include mobs, thieves or robbers (Bouvier’s Law Dictionary). NOTE: If majority of the stockholders of the respondent corporation were German subjects who became an enemy corporation upon the outbreak of the war between the United States and Germany, it stands to reason that an insurance policy ceases to be allowable as soon as an insured becomes a public enemy. The respondent having become an enemy corporation on December 10, 1941, the insurance policy issued in its favor on October 1, 1941, by a Philippine corporation had ceased to be valid and enforceable, and since the insured goods were burned after December 10, 1941, and during the war, the respondent was not entitled to any indemnity under said policy from the petitioner. However, elementary rules of justice (in the absence of specific provision in the Insurance Law) require that the premium paid by the respondent for the period covered by its policy from December 11, 1941, should be returned by the petitioner (Filipinas Compaña de Seguros v. Christern, Huenfeld and Co., Inc., G.R. No. L-2294 May 25, 1951).

Q: Philippine Health Care Providers, Inc. is engaged in operating a prepaid group practice health care delivery system or a health maintenance organization (HMO) to take care of the sick and disabled persons enrolled in the health care plan. Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various medical services provided by its duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic operated or accredited by it. Is Philippine Health Care Providers, Inc. a health maintenance organization or an insurance company?

Subject matter of a contract of insurance Anything having an appreciable pecuniary value, which is subject to loss or deterioration or of which

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW one may be deprived so that his pecuniary interest is or may be prejudiced.

pecuniary estimation, known as “insurable interest.”

Event or peril insured against

NOTE: In general (except in life insurance policies), a person is deemed to have an insurable interest in the subject matter insured where he has a relation or connection with or concern in it that he will derive pecuniary benefit or advantage from its preservation and will suffer pecuniary loss from its destruction or injury by the happening of the event insured against.

It is any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him subject to the provisions of Chapter I of the Insurance Code (Sec. 3, Insurance Code).

A life insurance policy may be taken by the creditor on the life of the debtor to the extent of the debt owed by the debtor.

Consent of spouse not necessary The consent of the spouse is not necessary for the validity of an insurance policy taken out by a married person on his or her life or that of his or her children (Sec. 3, Insurance Code).

On the other hand, no contract of policy of insurance on property shall be enforceable except for the benefit of some person having an insurable interest in the property insured. The lessor cannot be validly a beneficiary of an insurance policy taken by a lessee over his merchandise, and the provision in the lease contract for such automatic assignment is void for being contrary to law and/or public policy – the insurer cannot be compelled to pay the proceeds of the policy to a person who has no insurable interest in the property insured (Cha v. Court of Appeals, 277 SCRA 690 [1997]).

NOTE: Prior to the effectivity of the Insurance Code of 2013, the term used was “husband” instead of “spouse” (Sec. 3, Insurance Code).

Effect of death of policy’s original owner All rights, title and interest in the policy of insurance taken out by an original owner on the life or health of the person insured shall automatically vest in the latter upon the death of the original owner, unless otherwise provided for in the policy (Sec. 3, Insurance Code).

4. Assumption of Risk – The insurer assumes that risk of loss for a consideration. 5. Risk of loss – The insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated peril.

NOTE: Prior to the effectivity of the Insurance Code of 2013, the term used was “minor” instead of “the person insured.” A minor cannot enter into any contract of insurance with any insurance company.

NOTE: The inherent uncertainty of events is normally described in terms of risk. A contract possessing only the last three elements enumerated above is a risk-shifting device, but NOT a contract of insurance which is a risk-distributing device (De Leon, 2006).

Games of chances cannot be insured

Consequently, however, the existence of insurance could have the perverse effect of increasing the probability of loss. This is when the insured, having in mind the indemnification for loss or damage caused by the happening of the event insured against, would have reduced incentive to take steps to protect himself or his property, subject of insurance. This phenomenon is called moral hazard (ibid, pg. 28.).

An insurance for or against the drawing of any lottery, or for or against any chance or ticket in a lottery drawing a prize is not authorized (Sec. 4, Insurance Code). ELEMENTS OF CONTRACT OF INSURANCE Elements of contract of insurance (SPEAR) 1.

2.

3.

CHARACTERSITICS AND NATURE OF AN INSURANCE CONTRACT

Scheme to distribute losses – Such assumption of risk is part of a general scheme to distribute actual losses among a large group or substantial number of persons bearing a similar risk. Payment of premium – As consideration for the insurer’s promise, the insured makes a ratable contribution called “premium,” to a general insurance fund. Existence of insurable interest – The insured possesses an interest of some kind susceptible of UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Characteristics of an insurance contract 1. Consensual – It is perfected by the meeting of the minds of the parties as to the object, cause and consideration of the insurance contract. There should be acceptance of the application for insurance.

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INSURANCE CODE 2. Voluntary – The parties may incorporate such terms and conditions as they may deem convenient: Provided they do not contravene any provision of law and are not opposed to public policy, law, morals, good customs, or public order.

presumes that the insurer considered the personal qualifications of the insured in approving the insurance application (Sundiang, 2014). 7. Property – Since insurance is a contract, it is property in legal contemplation.

GR: The taking out of an insurance contract is not compulsory.

9. Risk-distributing device – Insurance serves to distribute the risk of economic loss among as many as possible of those who are subject to the same kind of loss. By paying a pre-determined amount into a general fund out of which payment will be made for an economic loss of a defined type, each member contributes to a small degree toward compensation for losses suffered by any member of the group. This broad sharing of economic risk is the principle of risk-distribution (Sundiang, 2014).

XPN: Liability insurance may be required by law in certain instances (E.g. compulsory motor vehicle liability insurance, or employees under Labor Code, or as a condition to granting a license to conduct a business or calling affecting the public safety or welfare). 3. Aleatory – The liability of the insurer depends upon some contingent event.

10. Onerous – There is a valuable consideration called the premium.

NOTE: An aleatory contract is a contract where one or both of the parties reciprocally bind themselves to give or do something upon the happening of an event which is uncertain, or which is to occur at an indeterminate time (Art. 2010, NCC).

CLASSES OF INSURANCE 1. Life insurance a. Individual life b. Group life c. Industrial life 2. Non-Life Insurance a. Marine b. Fire c. Casualty 3. Contracts of suretyship or bonding (De Leon, supra). 4. Compulsory Motor Vehicle Liability Insurance 5. Microinsurance

4. Unilateral – It imposes legal duties only on the insurer who promises to indemnify in case of loss. NOTE: It is executed as to the insured after the payment of the premium, and executory on the part of the insurer in the sense that it is not executed until payment for a loss.

5. Conditional – It is subject to conditions, the principal one of which is the happening of the event insured against.

MARINE INSURANCE

6. Contract of indemnity – Recovery is commensurate with the amount of the loss suffered.

Marine insurance GR: The insurer promises to make good only the loss of the insured.

Traditionally, marine insurance includes policies that covers risk connected with navigation to which a ship, cargo, freightage, profits or other insurable interest in movable property may be exposed during a certain voyage or a fixed period of time. However, under the present laws, it also covers inland marine insurance (Sundiang, 2014). Marine insurance includes:

XPN: The principle is not applicable to life and accident insurance where the result is death because life is not capable of pecuniary estimation. The only situation where the principle of indemnity is applicable to life insurance is when the interest of a person insured is capable of exact pecuniary measurement. An example would be in a case where a creditor insures the life of his debtor to the extent of the latter’s debt to the former.

a. Insurance against loss or damage to: (1) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, effects, disbursements, profits, moneys, securities, choses in action, instruments of debts, valuable papers, bottomry, and respondentia interests and all other kinds of property and interests therein, in respect to, appertaining to or in

6. Personal – Each party having in view the character, credit and conduct of the other. The law

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MERCANTILE LAW connection with any and all risks or perils of navigation, transit or transportation, or while being assembled, packed, crated, baled, compressed or similarly prepared for shipment or while awaiting shipment, or during any delays, storage, transshipment, or reshipment incident thereto, including war risks, marine builder’s risks, and all personal property floater risks; (2) 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 against loss by reason of bodily injury to any person arising out of ownership, maintenance, or use of automobiles); (3) Precious stones, jewels, jewelry, precious metals, whether in course of transportation or otherwise; and (4) 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.

illness or death or for loss of or damage to the property of another person (Sec. 101, [b], Insurance Code).

Major divisions of marine insurance 1. Ocean marine insurance –covers primarily sea perils of ships and cargoes. Scope: (GELS) a. Goods or cargoes b. Earnings such as freight, passage money c. Liability incurred by reason of maritime perils d. Ships or hulls NOTE: The insurer is liable only for such losses or damages proximately caused by the perils insured against (De Leon, supra, pg. 312.).

2. Inland marine insurance – Covers primarily the land or over the land transportation perils of property shipped by railroads, motor trucks, airplanes, and other means of transportation. It also covers risks of lake, river, or the other inland waterway transportation and other waterborne perils outside of those risks that fall definitely within the ocean marine category. Classes: (Pit-BaFF) a. Property In Transit – Provides protection to the property frequently exposed to loss while it is being transported from one location to another. b. Bailee liability – Provides protection to persons who have temporary custody of the goods or personal property of others, such as carriers, laundrymen, warehousemen, and garagekeepers. c. Fixed transportation property – Covers bridges, tunnels and other instrumentalities of transportation and communication, although as a matter of fact they are fixed property. They are so insured because they are held to be an essential part of transportation system. d. Floater– Provides insurance to follow the insured property wherever it may be located subject always to the territorial limits of the contract (De Leon, 2010).

b. Marine protection and indemnity insurance (Sec. 101, Insurance Code). NOTE: From the foregoing enumeration, marine insurance now includes, not only risks connected with marine navigation, but which are otherwise connected therewith such as insurance of aircraft, goods while being packed or assembled, injury to passengers, precious stones, jewels, jewelry whether in the course of transportation or not. (Perez, Quizzer and Reviewer on Commercial Laws, Vol. 1, 2010 ed.). 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 ship owner or not (Roque v. IAC, GR No. L-66935, Nov. 11, 1985).

Risk insured against in marine insurance GR: In the usual form of a marine policy, the risks insured against are only “perils of the sea”.

Marine protection and indemnity insurance

NOTE: The insured is bound to prove that the cause of the loss is a peril of the sea.

It is an 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, UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

XPN: When the insurance is an “all risk policy” and thus covers even “perils of the ship”. XPN to XPN: When the risks are expressly excepted by the “all risk policy”.

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INSURANCE CODE stored due to the defective drainpipe of the ship. The insured filed an action on the policy for recovery of the damages caused to the cargo. May the insured recover damages? (1998 Bar Question)

NOTE: The burden rests on the insurer to prove that the loss is caused by a risk that is excluded (Sundiang, supra. Pg. 136, citing Go Tiaco Y Hermanos vs. Union Insurance Society of Canton, 40 Phil. 40;Filipino Merchants Ins. Co. vs. CA, 179 SCRA 638; and Choa Tiek Seng vs. CA, 183 SCRA 223 [1990]).

A: No. The proximate cause of the damage to the cargo insured was the defective drainpipe of the ship. This is peril of the ship, and not peril of the sea. The defect in the drainpipe was the result of the ordinary use of the ship. To recover under a marine insurance policy, the proximate cause of the loss or damage must be peril of the sea.

“Perils of the sea or perils of navigation” It includes only those casualties due to the (WiN): 1. Unusual violence or extraordinary action of WInd and wave, or 2. Other extraordinary causes connected with Navigation (De Leon, 2010).

“All risks” marine insurance policy GR: It is that which insures against all causes of conceivable loss or damage.

“Perils of the ship” It is a loss which, in the ordinary course of events, results from the (NON): 1. Natural and inevitable action of the sea; 2. Ordinary wear and tear of the ship; 3. Negligent failure of the ship’s owner to provide the vessel with proper equipment to convey the cargo under ordinary conditions.

XPNs: 1. As otherwise excluded in the policy; or 2. Due to fraud or intentional misconduct on the part of the insured (Choa Tiek Seng v. CA, G.R. No. 84507 March 15, 1990). NOTE: An “all risks” policy grants greater protection than that afforded by the “perils clause” (De Leon, supra, pg. 313). The insured under an "all risks insurance policy" has the initial burden of proving that the cargo was in good condition when the policy attached and that the cargo was damaged when unloaded from the vessel; thereafter, the burden then shifts to the insurer to show the exception to the coverage (Filipino Merchants Insurance Co. vs. CA, 179 SCRA 638).

Q: Remington Industrial Sales Corporation (Remington) shipped on board a vessel seamless steel pipes from Japan to the Philippines and insured the shipment with Cathay Insurance Co. (Cathay). Upon receipt of said shipment, losses and damages were discovered. Upon demand under the insurance contract, it was denied by Cathay. Remington contends that the rust on the seamless still pipes is not an inherent vice of the shipment, thus the same is considered as a peril of the sea. Cathay, on the other hand claims that the loss was occasioned by an inherent defect or vice in the insured article. Is the “rusting” of the seamless steel pipes considered as a “peril of the sea”?

Extent of the insurable interest 1. Ship owner a. Over the value of the vessel, even when it has been chartered by one who covenants to pay him its value in case of loss. In such a case, the insurer shall be liable for only that part of the loss which the insured cannot recover from the charterer (Sec. 102, Insurance Code). b. If hypothecated by a bottomry loan, the insurable interest is only the excess of the value of the vessel over the amount secured by bottomry (Sec. 103, Insurance Code). c. He also has an insurable interest on expected freightage (Sec. 104, Insurance Code).

A: Yes. The rusting of steel pipes in the course of a voyage is a “peril of the sea” in view of the toll on the cargo of wind, water, and salt conditions. Moreover, it is a cardinal rule in the interpretation of contracts that any ambiguity therein should be construed against the maker/issuer/drafter thereof, namely, the insurer. Besides the precise purpose of insuring cargo during a voyage would be rendered fruitless (Cathay Insurance Co., v. CA, et al., G.R. No. L-76145, June 30, 1987).

2. Cargo owner – over the cargo and expected profits (Sec. 107, Insurance Code).

Q: A marine insurance policy on a cargo states that “the insurer shall be liable for losses incident to perils of the sea.” During the voyage, seawater entered the compartment where the cargo was

3. Charterer a. Over the vessel, to the extent of the amount he is liable to the shipowner, if the ship is lost or

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MERCANTILE LAW dameged during the voyage (Sec. 108, Insurance Code). b. Over his expected profits or freightage if he accepts cargoes from other persons for a fee (Sundiang, 2014). c. Over his own cargo or his client’s cargo (Sundiang, 2014).

the master is provided with funds for the purpose of purchasing a cargo. 2. Where the vessel is a mere “seeking ship”, the owner has no insurable interest in freight to be earned on goods not loaded. NOTE: A “seeking ship” is a vessel looking for cargo to be transported (De Leon, supra, pg. 323).

4. Creditor/lender – over the amount of the loan.

Insurable interest in expected profits

Loan on bottomry or respondentia

Insurable interest in expected profits exists: 1. When the interest in the thing involved is based on a legal right. 2. When the interest in thing involved is based on valuable consideration.

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 (Art. 719, Code of Commerce).

Special marine insurance contracts and clauses 1. All-risks policy 2. Barratry clause –a clause which provides that there can be no recovery on the policy in case of any willful misconduct on the part of the master or crew in pursuance of some unlawful or fraudulent purpose without the consent of the owner and to the prejudice of owner’s interest. It requires an intentional and willful act in its commission. No honest error or judgment or mere negligence, unless criminally gross, can be barratry (Roque v. IAC, G.R. No. L- 66935, Nov. 11, 1985). 3. Inchmaree clause – a clause which makes the insurer liable for loss or damage to the hull or machinery arising from the: a. Negligence of the captain, engineers, etc. b. Explosion, breakage of shafts; and c. Latent defect of machinery or hull (Thames and Mersey Marine Insurance Co v. Hamilton Fraser and Co [1887] 12 AC 484). 4. “Sue and labor” clause – a clause which makes the insurer liable for a. all the expenses attendant upon a loss which forces the ship into port to be repaired; and b. expenses incurred, where it is stipulated in the policy that the insured shall labor for the recovery of the property (Sec. 165, Insurance Code).

Loan on bottomry v. Loan on respondentia They are basically the same. The only distinction is, a loan on bottomry involves a vessel as a security, while a respondentia has cargo as its security (Perez, supra, pg. 153). Freightage It 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. 104, Insurance Code). Insurable interest in expected freightage in a charter party Insurable interest in expected freightage in a charter party exists from the time the vessel has broken ground on the chartered voyage (Sec. 106, Insurance Code). Insurable interest in expected freightage if there is no charter party If a price is to be paid for the carriage of goods, insurable interest in expected freightage exists when they are actually on board, or there is some contract for putting them on board, and both ship and goods are ready for the specified voyage (ibid).

NOTE: Insurer is liable for such expense, in either case, being in addition to a total loss, if that afterwards occurs (ibid).

Concealment in marine insurance

Instances when there is no insurable interest in freight 1.

It is the failure to disclose any material fact or circumstance which in fact or law is within, or which ought to be within the knowledge of one party and of which the other has no actual or presumptive knowledge (De Leon, 2010).

When there is no contract and no part of the goods expected to be carried are on board, although there are goods ready for shipment or UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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INSURANCE CODE NOTE: Information of the belief or expectation of a third person, in reference to a material fact, is material (Sec. 110, Insurance Code).

Effect of falsity of a representation by the insured 1. Promissory Representation - If a representation by the insured 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 (Sec. 113, Insurance Code). 2. Representation of Expectation - The eventual falsity of a representation as to expectation does not, in the absence of fraud, avoid a contract of marine insurance (Sec. 114, Insurance Code).

Presumption of knowledge of prior loss in marine insurance A person insured by a contract of marine insurance is presumed to have knowledge, at the time of insuring, of a prior loss, if the information might possibly have reached him in the usual mode of transmission and at the usual rate of communication (Sec. 111, Insurance Code). The presumption, however, is rebuttable.

Implied warranties in marine insurance (SINAI)

Concealment 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 1. 2. 3. 4. 5.

1. 2. 3.

National character of the insured; The liability of the thing insured to capture and detention; The liability to seizure from breach of foreign laws of trade; The want of necessary documents; and The use of false and simulated papers (Sec. 112, Insurance Code).

4. 5.

NOTE: Ordinarily, the matters concealed need not be the cause of the loss. In marine insurance, the above-mentioned matters, although concealed, will not vitiate the contract except when they caused the loss.

Seaworthiness 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 (Sec. 116, Insurance Code).

Concealment in marine insurance v. Concealment in other property insurance MARINE INSURANCE The information or the belief or expectation of 3rd persons in reference to a material fact is material and must be communicated. The concealment of any fact in relation to any of the matters stated in Sec. 112 does not vitiate the entire contract but merely exonerates the insurer from a risk resulting from the fact concealed.

Seaworthiness (Sec. 115 to 121, Insurance Code). Non-engagement from Illegal venture. Warranty of Neutrality – The ship will carry the requisite documents too show the nationality or neutrality of the ship or its cargo and will not carry any documents that cast reasonable suspicion on it if the nationality or neutrality of the ship or its cargo is expressly warranted (Sec. 122, Insurance Code). Non-deviation from the Agreed voyage (Secs. 125, 126, 127, Insurance Code). Presence of Insurable interest.

Scope of the seaworthiness of a vessel

OTHER PROPERTY INSURANCE The information or belief of a 3rd party is not material and need not be communicated, unless it proceeds from an agent of the insured whose duty is to give information.

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 (Sec. 118, Insurance Code).

Concealment of any material fact will vitiate the entire contract, whether or not the loss results from the risk concealed.

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MERCANTILE LAW Compliance with the warranty of seaworthiness

Payment made by the insurer to the insured for the latter’s lost cargo operates as waiver of the insurer’s right to enforce the implied warranty of seaworthiness. However, this waiver extends only in favor of the insured. There is no waiver in favor of the carrier that transported the cargo. The insurer can still claim payment against the carrier for breach of contract based on the insurer’s right of subrogation (Sundiang, 2014 citing Delsan Transport Lines, Inc. v. CA, G.R. No. 127897, Nov. 15, 2001).

GR: It is complied with if the ship is seaworthy at the time of the commencement of the risk (Sec. 117, Insurance Code). XPNs: 1. In the case of time policy - the ship must be seaworthy at the commencement of every voyage it undertakes during that time (Sec. 117, [a], Insurance Code). 2. In the case of cargo policy - each vessel upon which cargo is shipped or transshipped must be seaworthy at the commencement of each particular voyage (Sec. 117, [b], Insurance Code). 3. In the case of voyage policy contemplating a voyage in different stages- the ship must be seaworthy at the commencement of each portion of the voyage (Sec. 119, Insurance Code).

Effect when the ship becomes unseaworthy during the voyage An unreasonable delay in repairing the defect exonerates the insurer on ship or shipowner's interest from liability from any loss arising therefrom (Sec. 120, Insurance Code). Express warranty as to nationality and neutrality

Admission of seaworthiness by the insurer 1. Seaworthiness is admitted by the insurer when: 1. The warranty of seaworthiness is to be taken as fulfilled; or 2. The risk of unseaworthiness is assumed by the insurer (ibid).

2.

Effect of the admission of seaworthiness by the insurer

Rule regarding voyage in marine insurance When the voyage contemplated by a marine insurance policy is described by the places of beginning and ending, the voyage insured is one which conforms to the course of sailing fixed by mercantile usage between those places (Sec. 123, Insurance Code).

If the policy provides that the seaworthiness of the vessel as between insured and insurer is admitted, the issue of seaworthiness cannot be raised by the insurer without showing concealment or misrepresentation by the insured (Phil. American General Insurance Co. v. CA, G.R. No. 116940, June 11, 1997).

NOTE: If the course of sailing is not fixed by mercantile usage, the voyage insured is that way between the places specified, which to a master of ordinary skill and discretion, would mean the most natural, direct and advantageous (Sec. 124, Insurance Code).

Effect if unseaworthiness is unknown to the owner of the cargo It is immaterial in ordinary marine insurance and may not be used by him as a defense in order to recover on the marine insurance policy. It becomes the obligation of a cargo owner to look for a reliable common carrier, which keeps its vessels in seaworthy conditions. The shipper may have no control over the vessel but he has control in the choice of the common carrier that will transport his goods (Roque v. IAC, G.R. No. L- 66935, Nov. 11, 1985).

Deviation It is a departure from the course of the voyage insured, mentioned in Sec. 123 and Sec. 124, or an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage (Sec. 125, Insurance Code). Instances when deviation is proper

Effect of payment made by the insurer to the insured for the latter’s lost cargo in case the ship is unseaworthy

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

As to nationality – imports that the vessel belongs to the subject of a particular country. As to neutrality – imports that the property insured is neutral in fact, that is it belongs to neutrals and that no act of insured or his agent shall be done which can legally compromise its neutrality.

1.

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When caused by circumstances over which neither the master nor the owner of the ship has any control;

INSURANCE CODE 2.

3.

4.

When necessary to comply with a warranty, or to avoid a peril, whether or not peril is insured against; When made in good faith, and upon reasonable grounds of belief in its necessity to avoid a peril; or When made in good faith, for the purpose of saving human life or relieving another vessel in distress (Sec. 126, Insurance Code).

destination, of the thing insured (Sec. 132, Insurance Code). NOTE: Complete physical destruction is not essential to constitute actual total loss. 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 (Sec. 139, Insurance Code).

Improper deviation

Constructive total loss

Every deviation not specified under Sec. 126 is improper (Sec. 127, Insurance Code).

There is constructive total loss when: 1. More than ¾ thereof in value is actually lost, or would have to be expended to recover it from the peril; 2. The thing insured is injured to such extent as to reduce its value more than ¾; 3. 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 ¾ the value of the thing abandoned or a risk which a prudent man would not take under the circumstances; or 4. 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 no. (3). But freightage cannot in any case be abandoned (and thus declared constructively lost) unless the ship is also abandoned (Sec. 141, Insurance Code).

NOTE: In improper deviation, an insurer is not liable for any loss happening to the thing insured subsequent to an improper deviation (Sec. 128, Insurance Code).

Kinds of losses 1.

2.

Total, which may be: a. Actual total loss b. Constructive total loss Partial

Actual v. Constructive loss ACTUAL TOTAL LOSS It exists when the subject matter of the insurance is wholly destroyed or lost or when it is so damaged as no longer to exist in its original character. The insured has the right to claim the whole insurance without notice of abandonment (Sec. 137, Insurance Code).

CONSTRUCTIVE TOTAL LOSS It is one which the loss, although not actually total, is of such a character that the insured is entitled, if he thinks fit, to treat it as total by abandonment (Sec. 133, Insurance Code). Abandonment by the insured is necessary in order to recover for a total loss (Sec. 141, Insurance Code) in the absence of any provision to the contrary in the policy.

Presumption of actual loss 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 his presumption depends on the circumstances of the case (Sec. 134, Insurance Code). Liability of the insurer as regards the cargo in case of reshipment

Actual total loss

When a ship is prevented, at an intermediate port, from completing the voyage, by the perils insured against, the liability of a marine insurer on the cargo continues after they are thus reshipped. The insurer may, however, require additional premium if the hazard be increased by his extension of liability (Sec. 135, Insurance Code).

The following constitutes actual total loss: 1. A total destruction of the thing insured; 2. The irretrievable loss of the thing by sinking, or by being broken up; 3. Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or 4. Any other event which effectively deprives the owner of the possession, at the port of

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MERCANTILE LAW Additional liabilities of the insurer of goods referred to in the reshipment of cargo

benefit and profit of all the persons interested in the vessel and her cargo (Art. 809, ibid).

The marine insurer is bound for: 1. Damages; 2. Expenses of discharging; 3. Storage; 4. Reshipment; 5. Extra freightage; and 6. All other expenses incurred in saving cargo reshipped, up to the amount insured (Sec. 136, Insurance Code).

NOTE: This kind of average is suffered by and borne alone by the owner of the cargo or of the vessel, as the case may be (De Leon, 2010).

Liability of the insurer as to averages GR: The marine insurer is liable both for general average and particular average loss. XPN: When there is “Free From Particular Average” Clause in the policy making the insurer liable only for general average.

NOTE: Nothing in Sec. 136 and Sec. 135 shall render a marine insurer liable for any amount in excess of the insured value or, if there be none, of the insurable value.

NOTE: Free From Particular Average Clause (FFPA Clause) A clause agreed upon in a policy of marine insurance in which it is stated that the insurer shall not be liable for a particular average.

Average It 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 (Art. 806, Code of Commerce).

XPN to XPN: When particular average loss has the effect of depriving the insured of the possession at the port of destination of the whole of the thing insured (Sec. 138, Insurance Code). Abandonment

Kinds of average

It is the act of the insured by which, after a constructive total loss he declared the relinquishment to the insurer of his interest in the thing insured (Sec. 140, ibid).

1. Gross or general averages – damages or expenses which are deliberately caused by the master of the vessel or upon his authority, in order to save the vessel, her cargo or both at the same time from a real and known risk (Art. 811, ibid).

Effect of a valid abandonment

Requisites to the right to claim general average contribution

It is equivalent to a transfer by the insured of his interest, to the insurer, with all the chances of recovery and indemnity (Sec. 148, ibid).

a. There must be a common danger to the vessel or cargo; b. Part of the vessel or cargo was sacrificed deliberately; c. The sacrifice must be for the common safety or for the benefit of all; d. It must be made by the master or upon his authority; e. It must be successful, i.e. Resulted in the saving of the vessel or cargo; and f. It must be necessary (Sundiang, 2014).

Requisites of valid abandonment 1.

2. 3. 4.

NOTE: This kind of average must be borne equally by all of the interests concerned in the venture (De Leon, 2010).

5. 6.

2. Simple or particular averages – they include all damages and expenses caused to the vessel or to her cargo which have not inured to the common

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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There must be an actual relinquishment by the person insured of his interest in the thing insured (Sec. 140, ibid). There must be a constructive total loss (Sec. 141, ibid). The abandonment must neither be partial nor conditional (Sec. 142, ibid). It must be made within a reasonable time after receipt of reliable information of the loss (Sec. 143, ibid). It must be factual (Sec. 144, ibid). It must be made by giving notice thereof to the insurer which may be done orally or in writing; Provided, that if the notice be done orally, a written notice of such abandonment shall be

INSURANCE CODE

7.

submitted within 7 days from such oral notice (Sec. 145, ibid). The notice of abandonment must be explicit and must specify the particular cause of abandonment (Sec. 146, ibid).

insurer of said freightage; but freightage subsequently earned belongs to the insurer of the ship (Sec. 155, ibid). Effect of the insurer’s refusal to accept a valid abandonment

NOTE: Such notice must state only enough to show that there is probable cause for abandonment, but need not be accompanied with proof of interest or of loss.

If the insurer refuses to accept a valid abandonment, he is liable as upon an actual total loss, deducting from the amount any proceeds of the thing insured which may have come to the hands of the insured (Sec. 156, ibid).

Person who may make notice of abandonment The abandonment need not necessarily be made by the insured but may be made by an authorized agent, and an agent having an authority to insure has prima facie an authority to abandon (De Leon, 2010).

NOTE: However, if the abandonment was improper, the insured may nevertheless recover to the extent of the damage proved (De Leon, 2010).

Effect of insured’s failure to make abandonment

Person to whom notice of abandonment may be made

Forms of acceptance of abandonment

The insured has an election to abandon or not, and cannot be compelled to abandon although abandonment is proper. If the insured fails to abandon, he may nevertheless recover his actual loss (Sec. 157, Insurance Code).

1. 2.

Measure of indemnity

To the insurer or his authorized agent or the broker who is the agent for both parties (ibid).

Express Implied from the conduct of the insurer

1. Valued policy – the parties are bound by the valuation, if the insured had some interest at risk and there is no fraud (Sec. 158, ibid).

NOTE: Mere silence of the insurer for unreasonable length of time after notice shall be construed as an acceptance (Sec. 152, Insurance Code).

Effects of acceptance of abandonment 1.

The insurer becomes at once liable for the whole amount of the insurance and also becomes entitled to all rights which insured possessed in the thing insured (Sec. 148, ibid).

2.

GR: It fixes the rights of the parties; whether express or implied, it is conclusive upon them, (Sec. 153, ibid.) and irrevocable (Sec. 154, ibid).

NOTE: Overvaluation of property by the insured may take place either at the time of making the contract or at the time of submission of the proof of loss. In either event, such overvaluation, if fraudulent, entirely avoids the insurance. However, such fraudulent intent must be alleged and clearly proven by the insurer (Perez, 2006).

2. Open policy – the following rules shall apply in estimating a loss: a. Value of the ship – value at the beginning of the risk. b. Value of the cargo – actual cost to the insured, when laden on board, or where that cost cannot be ascertained, its market value at the time and place of lading, adding the charges incurred in purchasing and placing it on board, but without reference to any loss incurred in raising money for its purchase, or to any drawback on its exportation, or to the fluctuation of the market at the port of destination, or to expenses incurred on the way or on arrival. c. Value of freightage – gross freightage exclusive of primage, which is a small compensation paid by a shipper to the master of

XPN: Where the ground upon which it was made proves to be unfounded (Sec. 154, ibid). Under Sec. 147, abandonment can be sustained only upon the ground specified in the notice thereof. 3.

4.

It stops the insurer to rely on any insufficiency in the form, time, or right, of abandonment (Sec. 145, 143, 141, ibid). Whether the insured has a right to abandon is immaterial where the abandonment is accepted and there is no fraud (New Orleans Ins. Co. vs. Piaggio, 16 Wall. [US] 378). On accepted abandonment of a ship, freightage earned previous to the loss belongs to the

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MERCANTILE LAW the vessel for his care and trouble bestowed on the shipper’s goods and which the master is entitled to retain in the absence of an agreement to the contrary with the owners of the vessels. d. Cost of insurance – the cost of insurance is always added in calculating the value of the ship, cargo, or freightage or other subject matter in an open policy (De Leon, supra, pg. 372-373).

Co-insurance in marine insurance v. Co-insurance in fire insurance CO-INSURANCE IN MARINE INSURANCE There is co-insurance by virtue of Section 159 of the Insurance Code, as long as the above-enumerated requisites are present.

Drawback It is an allowance made by the government upon the duties due on imported merchandise when the importer, instead of selling there, re-exports it; or the refunding of such duties if already paid (Perez, 2006).

CO-INSURANCE IN FIRE INSURANCE There has to be an express stipulation to that effect.

Formula to determine the amount recoverable in co-insurance (Partial)

Primage

Loss

X

Amount of Insurance

= Amount of recovery

(Insurer’s Liability) Value of thing Insured

It is a small allowance or compensation payable to the master or owner of the vessel for the use of his cables and ropes to discharge the goods, and to the mariners for lading and unlading in any port (Perez, 2006).

Illustration If a vessel valued at P1M is insured for only P800, 000 and is damaged to the extent of P400, 000, the insurer will be required to pay only 80% of the loss suffered, or P320,000; the other 20% or P80,000 being borne by the insured himself.

NOTE: Drawback and primage are not included in determining the loss in a marine open policy.

Co-insurance Co-insurance is a form of insurance in which the person who insures his property for less than the entire value is understood to be his own insurer for the difference which exists between the true value of the property and the amount of insurance.

P400,000 or 2/5 X P800,000 = P320, 000 P1M The insured is considered a co-insurer as to the uninsured portion of P200,000. (1M – 800,000). NOTE: If the loss is total, the insurer is liable for the full amount of P800,000. On the other hand, if the property is insured to its full value, the insured is entitled to recover the full amount of the partial loss of P400,000.

In such a case, 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 (Sec. 159, Insurance Code).

Amount the insured is entitled to recover in case of loss if profits to be realized are separately insured

Requisites for co-insurance Where profits are separately insured in a contract of marine insurance, the insured is entitled to recover, in case of loss, a proportion of such profits equivalent to the proportion which the value of the property lost bears to the value of the whole (Sec. 160, Insurance Code).

There is co-insurance when the following requisites concur: 1. The loss is partial; and 2. The amount of insurance is less than the value of the property insured (Sundiang, 2014).

Conclusive presumption of loss of profits When profits are valued and insured by a contract of marine insurance, a loss of them is conclusively presumed from a loss of the property out of which they were expected to arise, and the valuation fixes their amount (Sec. 162, Insurance Code).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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INSURANCE CODE “Port of refuge expenses”

Ocean marine policies v. Fire policies

These are the additional expenses incurred in repairing the damages suffered by a vessel because of the perils insured against as well as those incurred for saving the vessel from such perils, such as the expense of launching or raising the vessel or of towing or navigating it into port for her safety. These are items to be borne by the insurer in addition to a total loss if that afterwards takes place (Sec. 165, Insurance Code).

OCEAN MARINE A policy of insurance on a vessel engaged in navigation is a contract of marine insurance although it insures against fire risks only.

FIRE INSURANCE Fire insurance It is a contract of indemnity by which the insurer, for a consideration, agrees to indemnify the insured against loss of or damage 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 (Sec. 169, ibid).

FIRE INSURANCE Where the hazard is fire alone and the subject is an unfinished vessel, never afloat for a voyage, the contract to insure is a fire risk, especially in the absence of an express agreement that it shall have the incidents of marine policy, or where it insures materials in a shipyard for use in constructing vessels. Also where a policy insures against fire, a vessel while moored and in use as a hospital. (De Leon, supra, pg. 380).

Distinction between marine and fire insurance NOTE: The liability of an insurer is to pay for direct loss only. The insurer may be liable to pay for consequential or indirect losses if covered by extension to such fire policies or insured under separate policy (De Leon, 2010).

1.

Indirect losses

2.

The following are indirect losses: 1. Physical damage caused to other property. 2. Loss of earnings due to the interruption of business by damage to the insured’s property. 3. Additional expenses incurred by the insurer following the damage to the property or contents by an insured peril (De Leon, 2010).

Requisites in order that the insurer may rescind a fire insurance policy on the ground of alteration made in the use or condition of the thing insured

Friendly fire v. Hostile fire FRIENDLY FIRE

HOSTILE FIRE

Fire that burns in a place where it is supposed to burn. E.g. Gas stove, fire place

Fire that escapes and burns in a place where it is not supposed to be. It may also refer to fire that started out as a friendly fire but escapes from its original place or it becomes too strong as it becomes out of control (Sundiang, 2014).

In marine insurance, the rules on constructive total loss (Secs. 133, 141, Insurance Code) and abandonment (Sec. 140, ibid) apply but not in fire insurance; In case of partial loss of a thing insured for less than its actual value, the insured in a marine policy is a co-insurer of the uninsured portion (Sec. 159, ibid), while the insured may only become a co-insurer in fire insurance if expressly agreed upon by the parties (Sec. 174, ibid) (De Leon, 2010).

1. 2. 3. 4. 5. 6.

The use or condition of the thing is specially limited or stipulated in the policy; Such use or condition is altered; The alteration is made without the consent of the insurer; The alteration is made by means within the control of the insured; and The alteration increases the risk (Sec. 170, Insurance Code). There must be a violation of a material policy provision (Sundiang,2014).

NOTE: A contract of fire insurance is not affected by any act of the insured subsequent to the execution of the policy, which does not violate its provisions even though it

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW increases the risk and is the cause of the loss (Sec. 172, Insurance Code).

In an open policy, the actual loss, as determined, will represent the total indemnity due the insured except only that the total indemnity shall not exceed the total value of the policy (Sundiang 2014, citing Development Insurance Corporation v. IAC, 143 SCRA 62).

Q: United Merchants Corporation (UMC)’s General Manager Alfredo Tan insured UMC’s stocks in trade of Christmas lights against fire with Country Bankers Insurance Corporation (CBIC). Unfortunately, a fire gutted the warehouse rented by UMC. When UMC demanded for payment under the insurance policy, CBIC rejected its claim due to breach of Condition No. 15 of the policy which states that if the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, all the benefits under the policy shall be forfeited. CBIC contends that because arson and fraud attended the claim, UMC is not entitled to recover under Condition No. 15 of the insurance policy. Is UMC is entitled to claim from CBIC the full coverage of its fire insurance policy?

Co-insurance clause in fire policies The co-insurance clause is a clause requiring the insured to maintain insurance to an amount equal to the value or specified percentage of the value of the insured property under penalty of becoming co-insurer to the extent of such deficiency. This is to prevent the property owners from taking out such small amount of insurance, and thereby reducing the premium payments and thereby increasing the rates of premium for all (De Leon, 2010).

A: No. The Insurance Code provides that a policy may declare that a violation of specified provisions thereof shall avoid it. Thus, in fire insurance policies, which contain provisions such as Condition No. 15 of the insurance policy, a fraudulent discrepancy between the actual loss and that claimed in the proof of loss voids the insurance policy. Mere filing of such a claim will exonerate the insurer (United Merchants Corporation v. Country Bankers Insurance Corporation, G.R. No. 198588, July 11, 2012).

NOTE: A co-insurance cannot exist in fire insurance if there is no stipulation to that effect.

Option to rebuild clause It gives the insurer the option to rebuild the destroyed property instead of paying the amount of the loss or damage, notwithstanding a fixed valuation in the policy (Sec. 174, Insurance Code). This clause serves to protect the insurer against unfairness in the appraisal and award rendered by a packed board of arbitrators, or in the proof of loss.

Effect when the insured has no control or knowledge of the alteration GR: The insurer is not relieved from liability if the acts or circumstances by which the risk is increased are occasioned by accident, or a cause over which the insured has no control.

NOTE: The insurer must exercise his option to rebuild within the time stipulated in the policy, or in the absence of stipulation, within a reasonable time. The choice by the insurer shall produce no effect except from the time it has been communicated to the insured (Article 1201, NCC).

XPNs: 1. Actually known to the insured or 2. Insured is presumed to know of the alteration when the acts or circumstances permanently and substantially affects the conditions of the property so as to constitute an increase in risk (De Leon, supra, pg. 383-384).

Unless the policy has limited the cost of rebuilding to the amount of the insurance, the insurer, after electing to rebuild, can be compelled to perform his undertaking, even though the cost may exceed the original amount of insurance (De Leon, 2010).

Measure of indemnity in open and valued policies in fire insurance OPEN POLICIES 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 it was at the time of the injury.

Insured can pledge, hypothecate or transfer a fire insurance policy or rights thereunder

VALUED POLICIES The parties are bound by the valuation, in the absence of fraud.

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

He may do so after a loss has occurred and even without the consent of, or notice to, the insurer. In such a case, it is not the personal contract which is being assigned, but a claim under or a right of action on the policy against the insurer (De Leon, 2010).

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INSURANCE CODE Limitation to the right of the insured in pledging, hypothecating or transferring his right under a fire insurance policy

7. 8.

Section 175 of the Insurance Code prohibits the exercise of this right in the case where the pledging, hypothecating, or transferring is made to any person, firm or company who acts as agent for or otherwise represents the insurer.

Two divisions of casualty insurance 1. Accident or health insurance – Insurance against specified perils which may affect the person and/or property of the insured. (E.g. personal accident, robbery/theft insurance) 2. Third party liability insurance (TPL) – Insurance against specified perils which may give rise to liability on the part of the insured of claims for injuries or damage to property of others (De Leon, 2010).

NOTE: Any such pledge, etc. shall be void and of no effect insofar as it may affect other creditors of the insured (ibid).

CASUALTY INSURANCE Casualty insurance It is an 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 (Sec. 176, Insurance Code).

“Accidental” v. “Intentional” as used in insurance

Coverage of casualty insurance 1.

2.

3.

4.

5.

6.

Health insurance – an indemnity to persons for expense and loss of time occasioned by disease. Other substantially similar kinds of insurance (Perez, 2006).

Employer's liability and workmen’s insurance – the risk insured against is the liability of the assured to make compensation or pay damages for an accident, injury, or death, occurring to a servant or other employee, in the course of his employment under statutes imposing such liability on employers. Public utility insurance – indemnifies against liability on account of injuries to the person or property of another. It may extend to automobiles, elevators, fly wheels, libel, theaters, and vessels. Motor vehicle liability insurance – is a contract of insurance against passenger and third-party liability for death or bodily injuries and damage to property arising from, motor vehicle accidents. Plate glass insurance – an insurance against loss from accidental breaking of plate-glass windows, doors, showcases, etc. Burglary and theft insurance – an insurance against loss of property by the depredations of burglars and thieves. Personal accident insurance – a form of insurance which undertakes to indemnify the assured against the expense, loss of time, and suffering resulting from accidents causing him physical injury, usually by payment at a fixed rate per week while the consequent disability lasts, and sometimes including the payment of a fixed sum to his heirs in case of his death by accident within the term of the policy.

ACCIDENTAL

INTENTIONAL

The terms “accident” and “accidental” have been taken to mean that which happens by chance or fortuitously, without intention or design, which is unexpected, unusual or unforeseen. The term does not, without qualification, exclude events resulting in damage or loss due to fault, recklessness or negligence of third parties (Sundiang, 2014 citing Pan Malayan Insurance Corp. V. CA, 184 SCRA 54).

Intentional as used in an accident policy excepting intentional injuries inflicted by the insured or any other person, implies the exercise of the reasoning faculties, consciousness, and volition. Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling. If the injuries suffered by the insured clearly resulted from the intentional act of a third person, the insurer is relieved from liability as stipulated (Sundiang, 2014 citing Biagtan v. The Insular Life Assurance Co. Ltd, 44 SCRA 58 [1972]).

Rules on Third party liability insurance 1. Insurable interest is based on the interest of the insured in the safety of the persons, and their property, who may maintain an action against him in case of their injury or destruction respectively (De Leon, 2010). 2. In a TPL insurance contract, the insurer assumes the obligation by paying the injured third party to whom the insured is liable. Prior payment by the insured to the injured third person is not necessary in order that the obligation of the insurer may arise. The

75

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW moment the insured becomes liable to third persons, the insured acquires an interest in the insurance contract which may be garnished like any other credit (Perla Compania de Seguros, Inc. vs. Ramolete, 203 SCRA 487 [1991]).

A: Yes. Clearly, the proximate cause of death was the boxing contest. Death sustained in a boxing contest is an accident (De la Cruz v. Capital Insurance & Surety Co.,G.R. No. L-21574, June 30, 1966).

3. In burglary, robbery and theft insurance, the opportunity to defraud the insurer (moral hazard) is so great that insurer have found it necessary to fill up the policies with many restrictions designed to reduce the hazard. The purpose of the exception is to guard against liability should theft be committed by one having unrestricted access to the property (Fortune Insurance & Surety Co. vs. CA, 244 SCRA 308 [1995]).

Liability of the insurer v. Liability of the insured INSURER The liability is direct but the insurer cannot be held solidarily liable with the insured and other parties at fault. Liability is based on contract The third-party liability is only up to the extent of the insurance policy and that required by law

4. The right of the person injured to sue the insurer of the party at fault (insured), depends on whether the contract of insurance is intended to benefit third persons also or only the insured (Eulogio vs. Del Monte, GR No. L-22042, August 17, 1967). If the contract provides for: a. Indemnity against third party liability – The third persons to whom the insured is liable, can sue directly the insurer upon the occurrence of the injury or event upon which the liability depends. The purpose is to protect the injured person against the insolvency of the insured who causes such injury and to give him a certain beneficial interest in the proceeds of the policy. It is as if the injured person were especially named in the policy (Shafer vs. RTC Judge, 167 SCRA 386 [1986]). b. Indemnity against actual loss or payment –The third persons cannot proceed against the insurer, the contract being solely to reimburse the insured for liability actually discharged by him through payment to third persons, said third person’s recourse being thus limited to the insured alone (Guingon vs. Del Monte, 20 SCRA 1043 [1967]). Prior payment by the insured is necessary to give rise to the obligation of the insurer.

Liability is based on tort. The liability extends to the amount of actual and other damages. (Heirs Poe v. Malayan Insurance, G.R. No. 156302, Apr. 7, 2009)

Q: While driving his car along EDSA, Cesar sideswiped Roberto, causing injuries to the latter, Roberto sued Cesar and the third party liability insurer for damages and/or insurance proceeds. The insurance company moved to dismiss the complaint, contending that the liability of Cesar has not yet been determined with finality. Is the contention of the insurer correct? (1996 Bar Question) A: No, the contention of the insurer is not correct. There is no need to wait for the decision of the court determining Cesar’s liability with finality before the third party liability insurer could be sued. The occurrence of the injury to Roberto immediately gave rise to the liability of the insurer under its policy. Where an insurance policy insures directly against liability, the insurer’s liability accrues immediately upon the occurrence of the injury or event upon which the liability depends (Shafer vs. RTC Judge, supra). Liability of insurer if the insured was committing a felony

Source of liability of a Third party liability insurance The insurer’s liability is based on contract; that of the insured is based on tort (Malayan Insurance Co. vs. CA, 165 SCRA 136 [1988]).

Liabilities arising out of acts of negligence, which are also criminal, are also insurable on the ground that such acts are accidental. Thus, a motor insurance policy covering the insured’s liability for accidental injury caused by his negligence, even though gross and attended by criminal consequences such as homicide through reckless imprudence, will not be void as against public policy. But liability consequences of deliberate criminal acts are not insurable (Sundiang, 2014).

Q: Lawrence, a boxer, is a holder of an accident insurance policy. In a boxing match, he died after being knocked out by the opponent. Can his father who is a beneficiary under said insurance policy successfully claim indemnity from the insurance company? (1990 Bar Question)

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

INSURED Liability is direct and can be held liable with all the parties at fault.

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INSURANCE CODE “No action” clause

3.

It is a requirement in a policy of liability insurance which provides that suit and final judgment be first obtained against the insured, that only thereafter can the person injured recover on the policy. It expressly disallows suing the insurer as co-defendant (Guingon v. Del Monte, G.R. No. L-21806, Aug. 17, 1967).

Suretyship v. Property insurance SURETYSHIP

NOTE: A “no action” clause must yield to the provisions of the Rules of Court regarding multiplicity of suits (Shafer v. RTC Judge, supra.).

It is an accessory contract. There are three parties: the surety, obligor/debtor, and the obligee/creditor. More of a credit accommodation with the surety assuming primary liability Surety is entitled to reimbursement from the principal and his guarantors for the loss it may suffer under the contract.

Rules in accident insurance 1.

2.

3.

Contractual – It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee (Sec. 178, ibid).

For death or injury to be covered by the policy, such should not be the natural or probable result of the insured’s voluntary act, or if something unforeseen occurs in the doing of the act which produces the injury, which may result to death (Dela Cruz vs. Capitol Insurance & Surety Co., supra). Suicide and willful exposure to needless peril are in pari matere because they both signify a disregard for one’s life. Voluntary exposure to a known danger is generally held to negate the accidental character of whatever followed from the known danger (De Leon, 2010). The insured’s beneficiary has the burden of proof in demonstrating that the cause of death is due to the covered peril. Once that fact is established, the burden shifts to the insurer to show any excepted peril that may have been stipulated by the parties (Vda. De Gabriel vs. CA, 264 SCRA 137 [1996]).

A bond may be canceled by or with the consent of the obligee or by the commissioner or by the court. Requires acceptance of the obligee before it becomes valid and enforceable. A risk-shifting device, the premium paid being in the nature of a service fee.

SURETYSHIP Contract of suretyship

PROPERTY INSURANCE The principal contract itself. There are only two parties: insurer and insured Generally a contract of indemnity

No right of recovery for the loss the insurer may sustain except when the insurer is entitled to subrogation. May be canceled unilaterally either by the insured or by the insurer on grounds provided by law. Does not need acceptance of any third party. A risk-distributing device, the premium paid being considered a ratable contribution to a common fund. (De Leon, 2010).

Rules of payment of premiums in suretyship

It 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 and under the provisions of Act No. 536, as amended by Act No. 2206 (Sec. 177, Insurance Code).

1.

2.

3.

Nature of liability of surety The liability of the surety or sureties shall be: 1. Solidary – Joint and several with the obligor and 2. Limited or fixed – Limited to the amount of the bond (It cannot be extended by implication).

4.

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The premium becomes a debt as soon as the contract of suretyship or bond is perfected and delivered to the obligor (Sec. 77, ibid); The contract of suretyship or bonding shall not be valid and binding unless and until the premium therefor has been paid; Where the obligee has accepted the bond, it shall be valid and enforceable notwithstanding that the premium has not been paid (Philippine Pryce Assurance Corp. v. CA, G.R.No. 107062, February 21, 1994); If the contract of suretyship or bond is not accepted by, or filed with the obligee, the surety shall collect only a reasonable amount;

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW 5.

6.

If the non-acceptance of the bond be due to the fault or negligence of the surety, no service fee, stamps, or taxes imposed shall be collected by the surety; and In the case of continuing bond (for a term longer than one year or with no fixed expiration date), the obligor shall pay the subsequent annual premium as it falls due until the contract is canceled (Sec. 179, Insurance Code) (De Leon, 2010).

Fumitechniks’ unpaid purchases. First Lepanto-Taisho thereafter demanded to Fumitechniks the submission of a copy of the agreement secured by the bond, together with copies of documents such as delivery receipts. Fumitechniks, however, denied that it executed such an agreement with Chevron, thus no copy of such agreement could be submitted. Because of this, Chevron Philippines, Inc. sued First Lepanto-Taisho for the payment of unpaid oil and petroleum purchases made by Fumitechniks. Is the surety liable to the creditor in absence of a written contract with the principal?

Types of surety bonds 1. Contract bonds – These are connected with construction and supply contracts. They are for the protection of the owner against a possible default by the contractor or his possible failure to pay materials, men, laborers and sub-contractors. The position of surety, therefore, is to answer for a failure of the principal to perform in accordance with the terms and specifications of the contract. There may be two bonds: a. Performance bond – One covering the faithful performance of the contract; and b. Payment bond – One covering the payment of laborers and material men.

A: No. Section 176 of the Insurance Code is clear that a surety contract should be read and interpreted together with the contract entered into between the creditor and the principal. A surety contract is merely a collateral one, its basis is the principal contract or undertaking which it secures. Necessarily, the stipulations in such principal agreement must at least be communicated or made known to the surety. Having accepted the bond, Chevron as creditor must be held bound by the recital in the surety bond that the terms and conditions of its distributorship contract be reduced in writing or at the very least communicated in writing to the surety. Such non-compliance by the Chevron impacts not on the validity or legality of the surety contract but on the creditor’s right to demand performance (First Lepanto-Taisho Insurance v. Chevron Philippines, Inc., G.R. No. 177839, January 18, 2012).

2. Fidelity bonds –They pay an employer for loss growing out of a dishonest act of his employee. For the purposes of underwriting, they are classified as: a. Industrial bond – One required by private employers to cover loss through dishonesty of employees; and b. Public official bond – One required of public officers for the faithful performances of their duties and as a condition of entering upon the duties of their offices.

LIFE INSURANCE Life insurance It is insurance on human lives and insurance appertaining thereto or connected therewith (Sec. 181, Insurance Code). It is 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 (Sec. 182, ibid).

3. Judicial bonds – They are those which are required in connection with judicial proceedings (ibid). Q: Fumitechniks Corporation, represented by Ma. Lourdes Apostol, had applied for and was issued a surety bond by First Lepanto-Taisho Insurance Corporation (First Lepanto-Taisho) for the amount of P15,700,000.00. As stated in the attached rider, the bond was in compliance with the requirement for the grant of a credit line with the Chevron Philippines, Inc. (Chevron) to guarantee payment of the cost of fuel products withdrawn within the stipulated time in accordance with the terms and conditions of agreement between Chevron and Fumitechniks. When Fumitechniks defaulted on its obligation, Chevron notified First Lepanto-Taisho of UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

NOTE: Every contract or undertaking for the payment of annuities including contracts for the payment of lump sums under a retirement program where a life insurance company manages or acts as a trustee for such retirement program shall be considered a life insurance contract for purposes of the Insurance Code (Sec. 181, Insurance Code). Every contract or pledge for the payment of endowments or annuities shall also be considered a life insurance contract under the Insurance Code (Sec. 182, Insurance Code).

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INSURANCE CODE Who may exercise any right under the policy

within the period, his beneficiaries benefit. If he outlives the period, no person benefits from the insurance. 5. Industrial life – entitles the insured to pay premiums weekly, or where premiums are payable monthly or oftener (Sundiang, 2014).

In the absence of a judicial guardian, the father, or in the latter’s absence or incapacity, the mother, of 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 Five hundred thousand pesos (P500,000.00) or in such reasonable amount as may be determined by the Commissioner. 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 minor’s consent to any transaction on the policy.

Contract of life annuity It is a contract to pay the insured, or a named person or persons, a sum or sums periodically during life or certain period (Perez, 2006). Measure of indemnity under a policy of insurance upon life or health GR: The measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy.

In the absence or in case of the incapacity of the father or mother, the grandparent, the eldest brother or sister at least eighteen (18) years of age, or any relative who has actual custody of the minor insured or beneficiary, shall act as a guardian without need of a court order or judicial appointment as such guardian, as long as such person is not otherwise disqualified or incapacitated. Payment made by the insurer pursuant to this section shall relieve such insurer of any liability under the contract (Sec. 182, Insurance Code).”

XPN: The interest of a person insured is susceptible of exact pecuniary measurement (Sec. 186, Insurance Code). Liability of the insurer in case of suicide The insurer shall be liable in case of suicide by the insured if: 1. The suicide is committed after the policy has been in force for a period of 2 years from the date of its issue or of its last reinstatement. 2. The suicide is committed within a shorter period as provided in the policy. 3. The suicide is committed in the state of insanity regardless of the date of commission (Sec. 183, ibid.)

Life insurance is also a contract of indemnity This is because of the following reasons: 1. The liability in life insurance is absolutely certain 2. Amount of life insurance generally is without limit 3. The policy is a valued policy 4. There is no direct pecuniary loss required (De Leon, 2010).

Q: Sun Insurance Co. issued to Tan a life policy having this provision: “the company shall not be liable in respect of ‘bodily injury’ consequent upon the insured person who willfully exposes himself to needless peril except in an attempt to save human life". Tan designated his wife, Beverly as beneficiary.

Kinds of life insurance policies 1. Ordinary life, general life or old line policy – Insured pays a premium every year until he dies. Cash surrender value after 3 years. 2. Limited payment – 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. 3. Endowment – insured 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. 4. Term insurance – insured pays premium only once, and he is insured for a specified period. If he dies

One evening, Tan, while playing with his hand gun, suddenly stood in front of his secretary and pointed the gun at her. Startled, she pushed the gun aside and said that it may be loaded. Thus, Tan, to assure her that it was not loaded, pointed it at his temple. The next moment, there was an explosion and Tan slumped to the floor lifeless. Beverly, then claimed the proceeds from Sun Insurance, but the latter rejected her claim on the ground that the death of Tan was not accidental. Beverly sued the insurer. Will Beverly’s claim prosper?

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW A: Beverly can recover the proceeds of the policy from the insurer. The death of the insured was not due to suicide or willful exposure to needless peril which are excepted risks. The insured’s act was purely an act of negligence which is covered by the policy and for which the insured got the insurance for his protection. In fact, he removed the magazine from the gun and when he pointed the gun to his temple he did so because he thought that it was safe for him to do so. He did so to assure his sister that the gun was harmless. There is none in the policy that would relieve the insurer of liability for the death of the insured since the death was an accident (Sun Insurance v CA, G.R. Nos. 79937-38, February 13, 1989). Q: X, in January 30, 2009, or two (2) years before reaching the age of 65, insured his life for Php20Million. For reason unknown to his family, he took his own life two (2) days after his 65th birthday. The policy contains no excepted risk. Which statement is most accurate? (2012 Bar Question) a. The insurer will be liable. b. The insurer will not be liable. c. The state of sanity of the insured is relevant in cases of suicide in order to hold the insurer liable. d. The state of sanity of the insured is irrelevant in cases of suicide in order to hold the insurer liable. A: A. The insurer will be liable under Sec. 183 of the Insurance Code. The suicide is committed after the policy has been in force for a period of 2 years from the date of its issue.

or when loss occurs.

also when the loss occurs.

Insurable interest need not have any legal basis. Contingency that is contemplated is a certain event, the only uncertainty being the time when it will take place. The liability of the insurer to make payment is certain, the only uncertain element being when such payment must be made. May be terminated by the insured but cannot be cancelled by the insurer and is usually a long term contract. The “loss” to the beneficiary caused by the death of the insured can seldom be measured accurately in terms of cash value. The beneficiary is under no obligation to prove actual financial loss as a result of the death of the insured in order to collect the insurance.

Insurable interest must have a legal basis. The contingency insured against may or may not occur. Liability is uncertain because the happening of the peril insured against is uncertain. May be cancelled by either party and is usually for a term of one year

The reverse is generally true of the loss of property, i.e., it is capable of pecuniary estimation. The insured is required to submit proof of his actual pecuniary loss as a condition precedent to collecting the insurance.

COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE

Life insurance v. Fire /marine insurance Motor vehicle liability insurance LIFE INSURANCE It is a contract of investment not contract of indemnity. Always regarded as valued policy. May be transferred or assigned to any person even if he has no insurable interest. The consent of the insurer is not essential to the validity of the assignment of a life policy unless expressly required. Insurable interest in the life or health of the person insured need not exist after the insurance takes effect

FIRE/MARINE INSURANCE It is a protection coverage that will answer for legal liability for losses and damages for bodily injuries or property damage that may be sustained by another arising from the use and operation of a motor vehicle by its owner (Compulsory Motor Vehicle Liability Insurance, pg.3, prepared and distributed by the Insurance Commission).

It is a contract of indemnity. May be open or valued. The transferee or assignee must have an insurable interest in the thing insured.

The Insurance Code makes it unlawful for any land transportation operator or owner of a motor vehicle to operate the same in public highways unless there is an insurance or guaranty to indemnify the death or bodily injury of a third party or passenger arising from the use thereof (Sec. 387, Insurance Code). Registration of any vehicle will not be made or renewed without complying with the requirement (Sec. 389, Insurance Code).

Consent, in the absence of waiver by the insurer, is essential in the assignment of the policy. Insurable interest in the property insured must exist not only when the insurance takes effect but

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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INSURANCE CODE Purpose of motor vehicle liability insurance

4. Owner or Motor vehicle owner (MVO)

To give immediate financial assistance to victims of motor vehicle accidents and/or their dependents, especially if they are poor regardless of financial capability of motor vehicle owners or operators responsible for the accident sustained (First Integrated Bonding Insurance Co., Inc. v. Hernando, G.R. No. L-51221, July 31, 1991).

Actual legal owner of a motor vehicle, whose name such vehicle is duly registered with the Land Transportation Office (Sec. 386, [d], ibid). 5. Land transportation operator (LTO) The owner or owners of motor vehicles for transportation of passengers for compensation, including school buses (Sec. 386, [e], ibid).

NOTE: The insurer’s liability accrues immediately upon the occurrence of the injury or event upon which the liability depends, and does not depend on the recovery of judgment by the injured party against the insured (Shafer v. Judge, RTC, 167 SCRA 386).

Persons required to maintain a compulsory motor vehicle liability insurance (CMVLI) policy to operate motor vehicle/s in public highways

Definitions

1. 2.

1. Motor vehicle Any vehicle propelled by any power other than muscular power using the public highways, but excepting road rollers, trolleys cars, street sweepers, sprinklers, lawn mowers, bulldozers, graders, forklifts, amphibian trucks, and cranes if not used in public highways, vehicles which run only on rails or tracks, and tractors, trailers and traction engines of all kinds used exclusively for agricultural purposes (Sec. 3[a] of RA 4136).

Motor vehicle owner (MVO) Land transportation operator (LTO) (Sec. 387, ibid).

Scope of coverage required for compulsory motor vehicle liability insurance 1.

2.

NOTE: Trailers having any number of wheels, when propelled or intended to be propelled by attachment to a motor vehicle shall be classified as separate motor vehicle with no power rating (ibid).

For MVOs, the coverage must be comprehensive against third party liability for death or bodily injuries. If the private motor vehicle is being used to transport passengers for compensation, the coverage shall include passenger liability. For LTOs, coverage must be comprehensive against both passenger and third-party liabilities for death or bodily injuries (Ins. Memo. Cir. No. 3-81).

Substitutes for a compulsory motor vehicle liability insurance policy

2. Passenger

Instead of a CMVLI policy, MVOs or LTOs may either: 1. Post a surety bond with the Insurance Commissioner who shall be made the obligee or creditor in the bond in such amount or amounts required as limits of indemnity to answer for the same losses sought to be covered by a CMLVI policy; or 2. Make a cash deposit with the Insurance Commission in such amount or amounts required as limits of indemnity for the same purpose (Sec. 390, ibid).

Any fare-paying person being transported and conveyed in and by a motor vehicle for transportation of passengers for compensation, including persons expressly authorized by law or by the vehicle’s operator or his agents to ride without fare (Sec. 386, [b], Insurance Code). 3. Third-party Any person other than a passenger as defined in this section (ibid.) and shall also exclude a member of the household, or a member of the family within the second degree of consanguinity or affinity, of a motor vehicle owner or land transportation operator, as likewise defined herein, or his employee in respect of death, bodily injury, or damage to property arising out of and in the course of employment (Sec. 386, [c], ibid).

NOTE: After the cash deposit or surety bond has been proceeded against by the Insurance Commissioner, such cash deposit shall be replenished or such surety bond shall be restored by the MVO or LTO in the right amount/s required as limit of liability within 60 days after impairment or expiry, otherwise, he shall secure a CMLVI required (ibid).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Duties of motor vehicle owner or land transportation operator in contemplation of the cancellation of the policy

No fault indemnity clause (1994 Bar Question) It is a clause where the insurer is required to pay a third party injured or killed in an accident without the necessity of proving fault or negligence on the part of the insured. There is a stipulated maximum amount to be recovered.

Contemplating the cancellation of the policy, the MVO or LTO shall: 1. Give to the insurance or surety company concerned a written notice of his intention to cancel; 2. Secure, before the insurance policy or surety bond ceases to be effective, another similar policy or bond to replace that one canceled; 3. Without making any replacement, make a cash deposit in sufficient amount with the Insurance Commissioner and secure a certification from the Insurance Commissioner regarding the deposit made for presentation to and filing with the Land Transportation Office (CMVLI, supra pg. 12) (Sec. 393-394, Insurance Code).

Rules under the “no fault indemnity clause” 1.

2.

Effects of the cancellation of the policy

3.

GR: Upon receipt of the notice of such cancellation, the Land Transportation Office shall order the immediate confiscation of the plates of the motor vehicle concerned.

4.

5. XPNs: No confiscation will be ordered if said Office receives any of the following: 1. An evidence or proof of a new and valid CMVLI cover which may be either an insurance policy or guaranty in cash or surety bond; 2. A signed duplicate of an endorsement or addendum issued by the insurance company concerned showing revival or continuance of the CMVLI cover; or 3. A certification issued by the Insurance Commissioner to the effect that a cash deposit in the amount required as limit of indemnity has been made with him by the MVO or LTO (CMVLI, supra, p. 12, Sec. 393, Insurance Code).

6.

NOTE: The claimant is not free to choose from which insurer he will claim the "no fault indemnity," as the law, by using the word "shall”, makes it mandatory that the claim be made against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. That said vehicle might not be the one that caused the accident is of no moment since the law itself provides that the party paying may recover against the owner of the vehicle responsible for the accident (Perla Compania de Seguros, Inc. v. Ancheta, G.R. No. L-49599, Aug. 8, 1988).

“Own damage” coverage

This no-fault claim does NOT apply to property damage. If the total indemnity claim exceeds P15, 000 and there is controversy in respect thereto, the finding of fault may be availed of by the insurer only as to the excess. The first P15, 000 shall be paid without regard to the fault (CMVLI, supra, pg.13).

It simply meant that the insurer had assumed to reimburse the costs for repairing the damage to the insured vehicle, as opposed to damage to third party vehicle/property. The phrase “own damage” does not mean damage to the insured car caused by the assured itself, instead, of third parties (Pan Malayan Insurance Corporation v. Court of Appeals, 184 SCRA 54 [1990]).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

The total indemnity in respect of any one person shall not exceed P15,000 for all motor vehicles (Ins. Memo. Circ. No. 4-2006). Proof of loss: a. Police report of accident b. Death certificate and evidence sufficient to establish proper payee c. Medical report and evidence of medical or hospital disbursement (Sec. 391 [3], Insurance Code). Claim may be made against one motor vehicle only (Sec. 391 [c], ibid). In case injury of an occupant of a vehicle, the claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from (ibid). In any other case (not an occupant), claim shall lie against the insurer of the directly offending vehicle (ibid). 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 (ibid).

Q: X is a passenger of a jeepney for hire being driven by Y. The jeepney collided with another passenger jeepney being driven by Z who was driving recklessly. As a result of the collision, X suffered injuries. Both passenger jeepneys are covered by Comprehensive Motor Vehicular Insurance

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INSURANCE CODE Coverage. If X wants to claim under the "no fault indemnity clause", his claim will lie – (2012 Bar Question)

Theft There is theft if the vehicle is taken with intent to gain without the consent of the insured-owner. Thus, there is theft even if: 1. The vehicle is returned; 2. The vehicle was stolen by the driver of the insured (Alpha Insurance and Surety Company v. Castor, G.R. 198174, September 2, 2013). 3. The vehicle was taken to the owner of a repair shop for the purpose of repair and in order to attach accessories (Paramount Insurance v. Spouses Remondeulaz, G.R. No. 173773, November 28, 2012) (Sundiang, 2014).

A: Against the insurer of the passenger jeepney driven by Y because X was his passenger. The Insurance Code states that in the case of an occupant of a vehicle, the claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. Authorized driver clause It indemnifies the insured owner against loss or damage to the car but limits the use of the insured vehicle to: 1. The insured himself; or

Limitations with respect to compulsory motor vehicle liability insurance over solicitation

NOTE: The insured need not prove that he has a driver’s license at the time of the accident if he was the driver (Sundiang, 2014).

1.

2. Any person who drives on his order or with his permission; provided, that the person driving is permitted to drive the motor vehicle in accordance with the law, and is not disqualified (Villacorta v. Insurance Commissioner, G.R. No. 54171, October 28, 1980).

2. 3.

NOTE: The main purpose of this clause is to require a person other than the insured, who drives the car on the insured’s order or with his permission, to be duly licensed drivers and have no disqualification to drive a motor vehicle (Villacorta v. Insurance Commission, G.R. No. L-54171, Oct. 28, 1980).

No government office or agency having the duty of implementing the provisions of the Insurance Code on CMVLI shall act as agent in procuring the insurance policy or surety bond required; No official or employee of such office or agency shall similarly act as such agent; and The commission of an agent procuring the corresponding insurance policy or surety bond shall in no case exceed 10% of the amount of premiums therefore (Sec. 400, Insurance Code).

Q: When a passenger jeepney, insured but with an authorized driver’s clause and was driven by a driver who only holds a Traffic Violation Report (TVR) because his license was confiscated, met an accident, may the owner of the jeepney claim from the insurance company? (2003 Bar Question)

An Irish citizen whose 90-day tourist visa had expired, cannot recover on his car insurance policy, not being authorized to drive a motor vehicle without a Philippine driver’s license (Stokes v. Malayan Insurance Co., Inc. 127 SCRA 766 [1984]).

A: Yes. The fact that the driver was merely holding a TVR does not violate the condition that the driver should have a valid and existing driver’s license. Besides, such a condition should be disregarded because what is involved is a passenger jeepney, and what is involved here is not own damage insurance but third party liability where the injured party is a third party not privy to the contract of insurance.

A driver with an expired Traffic Violation Receipt or expired Temporary Operator’s permit is not considered an authorized driver within the meaning of the insurance policy. The Traffic Violation Receipt is coterminous with a confiscated license under the Motor Vehicle Law (Gutierrez v. Capital Insurance & Surety Co., Inc., G.R. No. L-26287 [1984]).

MICROINSURANCE Microinsurance

Theft clause

It is a financial product or service that meets the risk protection needs of the poor where:

It is that which includes theft as among the risks insured against. Where a car is unlawfully and wrongfully taken without the knowledge and consent of the owner, such taking constitutes “theft” and it is the theft clause, not the authorized driver clause which should apply (Perla Compania de Seguros, Inc. v. CA, 208 SCRA 487 [1992]).

a. The amount of contributions, premiums, fees or charges, computed on a daily basis, does not exceed seven and a half percent (7.5%) of the current daily

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW minimum wage rate for nonagricultural workers in Metro Manila; and b. The maximum sum of guaranteed benefits is not more than one thousand (1000) times of current daily minimum wage rate for nonagricultural workers in Metro Manila (Sec. 187, Insurance Code).

Insurable interest in life insurance v. Insurable interest in property insurance

As to extent NOTE: No insurance company or mutual benefit association shall engage in the business of microinsurance unless it possesses all the requirements as may be prescribed by the Commissioner. The Commissioner shall issue such rules and regulations governing microinsurance (Sec. 188, Insurance Code).

INSURABLE INTEREST Insurable interest An insurable interest is that interest which a person is deemed to have in the subject matter insured, where he has a relation or connection with or concern in it, such that the person will derive pecuniary benefit or advantage from the preservation of the subject matter insured and will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against (Violeta R. Lalican vs. The Insular Life Assurance Company Limited, G.R. No. 183526, August 25, 2009).

When must insurable interest exist

NOTE: The existence of insurable interest is a matter of public policy and is not susceptible to the principle of estoppel. The existence of an insurable interest gives a person the legal right to insure the subject matter of the policy of insurance (ibid).

INSURABLE INTEREST IN LIFE GR: Every person has an unlimited insurable interest in his own life (De Leon, 2010). XPN: Where life insurance is taken out by a creditor on the life of the debtor, insurable interest is limited to the amount of debt Must exist at the time the policy takes effect and need not exist thereafter (Sec. 19, Insurance Code).

When does a person has insurable interest As to the beneficiary’s interest

GR: A person is deemed to have an insurable interest in the subject matter insured where he has a relation or connection with or concern in it that he will derive pecuniary benefit or advantage from its preservation and will suffer pecuniary loss from its destruction or injury by the happening of the event insured against. XPN: To have an insurable interest in the life of a person, the expectation of benefit from the continued life of that person need not necessarily be of pecuniary nature (De Leon, 2010).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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The beneficiary need not have insurable interest over the life of the insured if the insured himself secured the policy. However, if the life insurance was obtained by the beneficiary, the latter must have insurable interest over the life of the insured (Sundiang, 2014).

INSURABLE INTEREST IN PROPERTY Limited to the actual value of the property

GR: Must exist both at the time the policy takes effect and the time of loss, but need not exist in the period in between (Sec. 19, ibid). XPN: Secs. 21-24; 25, ibid. The beneficiary must have insurable interest over the thing insured (Sundiang, 2014).

INSURANCE CODE Existence of insurable interest in life and property insurance

Effect of the irrevocable designation of the beneficiary to the assignment of the policy

For both life and property insurance, the insurable interest is required to exist at the time of perfection of the policy. For property insurance, the insurable interest must also exist at the time of loss, however, in case of life insurance, the insurable interest need to exist only at the time of perfection and not thereafter (Sec. 19, ibid).

The insured cannot assign the policy if the designation of the beneficiary is irrevocable. The irrevocable beneficiary has a vested right (Sundiang, 2014).

Q: X owned a house and lot. X insured the house. The house got burned. Then he sold the partially burnt house and the lot to Y. Which statement is most accurate? (2012 Bar Question) a. X is not anymore entitled to the proceeds of the insurance policy because he already sold the partially burnt house and lot. b. X is still entitled to the proceeds of the insurance policy because what is material is that at the time of the loss, X is the owner of the house and lot. c. No one is entitled to the proceeds because ownership over the house and lot was already transferred. d. Y will be the one entitled to the proceeds because he now owns the partially burnt house and lot.

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. Notwithstanding the foregoing, in the event the insured does not change the beneficiary during his lifetime, the designation shall be deemed irrevocable (Sec. 11, Insurance Code).

When designation irrevocable

of

beneficiary

is

NOTE: The foregoing provision is an incorporated in the Insurance Code of 2013.

deemed

amendment

Void stipulations in an insurance contract Every stipulation in an insurance contract: 1. For the payment of loss whether the person insured has or does not have any insurable interest in the subject-matter of insurance, or 2. That the policy shall be received as proof of such interest, and 3. Every policy executed by way of gaming or wagering is VOID (Sec. 25, ibid).

A: B. X is still entitled to the proceeds of the insurance policy because what is material is that at the time of the loss, X is the owner of the house and lot. After the loss occurs, the right of the insured under the policy becomes fixed and a subsequent conveyance by the insured cannot affect the insurer’s liability (Perez, supra, pg. 43, citing Florea vs. Iowa State Ins. Co., 32 SW 2d 11, 225 Mo. App. 49).

IN LIFE/ HEALTH Two general classes of life policies

Mere hope or expectancy is not insurable

1. Insurance upon one’s life – are those taken out by the insured upon his own life (Section 10[a], Insurance Code) for the benefit of himself, or of his estate, in case it matures only at his death, for the benefit of third person who may be designated as beneficiary.

A mere contingent or expectant interest in any thing, not founded on an actual right to the thing, nor upon any valid contract for it, is not insurable (Sec. 16, ibid). Right of the insured to change the beneficiary he designated

The question of insurable interest is immaterial where the policy is procured by the person whose life is insured. A person who insures his own life can designate any person as his beneficiary, whether or not the beneficiary has an insurable interest in the life of the insured subject to the limits under Articles 739 and 2012 of the New Civil Code (De Leon, 2010).

GR: The insured shall have the right to change the beneficiary he designated in the policy XPN: If the insured expressly waived this right in the said policy.

2. Insurance upon life of another – are those taken out by the insured upon the life of another. Where a person names himself beneficiary in a policy he takes on the life of another, he must have insurable

NOTE: Under Sec. 64 of the Family Code, the innocent spouse is allowed to revoke the designation of the other spouse as irrevocable beneficiary after legal separation.

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW interest in the life of the latter (De Leon,2010). This class includes the following: a. His spouse and of his children. b. 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. d. Of any person upon whose life any estate or interest vested in him depends (Sec. 10, Insurance Code).

beneficiary will receive the proceeds or profits of said insurance (The Insular Life Assurance Company, Ltd., v. Carponia T. Ebrado and Pascuala Vda. De Ebrado, G.R. No. L-44059, [1977]). Extent of the creditor’s recovery from the insurance he procured upon the life of the debtor, if the latter dies It is limited only to the extent of the amount of the debt at the time of debtor’s death and the cost of carrying the insurance on the debtor’s life. Consent of the person insured is not essential to the validity of the policy

NOTE: In paragraph (a) of Section 10 of the Insurance Code, mere relationship is sufficient while the rest (pars. b, c, and d) requires pecuniary interest. Thus, the interest of the creditor over the life of the debtor ceases upon full payment (Sundiang, 2009).

So long as it could be proved that the insured has an insurable interest at the inception of the policy, the insurance is valid even without such consent (Sec. 10, Insurance Code).

Persons prohibited from being designated as beneficiaries

Effect if the beneficiary willfully brought about the death of the insured

Under the Article 739 of the New Civil Code, the following are prohibited designation of beneficiaries: 1. Those made between persons who were guilty (finding of guilt in a civil case is sufficient) of adultery or concubinage at the time of 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 or ascendants by reason of his office.

GR: The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice, or accessory in willfully bringing about the death of the insured. In such a case, the share forfeited shall pass on to the other beneficiaries, unless otherwise disqualified. In the absence of other beneficiaries, the proceeds shall be paid in accordance with the policy contract. If the policy contract is silent, the proceeds shall be paid to the estate of the insured (Sec. 12, ibid). NOTE: The rule provided was an amendment stated in the Insurance Code of 2013.

NOTE: The designation of the above-enumerated persons is void but the policy is binding. The estate will get the proceeds (Sundiang, 2009).

XPNs: 1. The beneficiary acted in self-defense; 2. The insured’s death was not intentionally caused (e.g., thru accident); 3. Insanity of the beneficiary at the time he killed the insured.

Q: Can a common-law wife named as beneficiary in the life insurance policy of a legally married man claim the proceeds thereof in case of death of the latter? A: No. Under Article 2012 of the New Civil Code, 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 a donation to him. Common-law spouses are, definitely, barred from receiving donations from each other. In essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is concerned. Both are founded upon the same consideration: liberality. A beneficiary is like a donee, because from the premiums of the policy which the insured pays out of liberality, the UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Q: X is the common law wife of Y. Y loves X so much that he took out a life insurance on his own life and made her the sole beneficiary. Y did this to ensure that X will be financially comfortable when he is gone. Upon the death of Y, a) X as sole beneficiary under the life insurance policy on the life of Y will be entitled to the proceeds of the life insurance.

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INSURANCE CODE b) despite the designation of X as the sole beneficiary, the proceeds of the life insurance will go to the estate of Y. c) the proceeds of the life insurance will go to the compulsory heirs of Y. d) the proceeds of the life insurance will be divided equally amongst X and the compulsory heirs of Y. (2012 Bar Question)

Examples of insurable interest arising from equitable title: a. Purchaser of property before delivery or before he has performed the conditions of the sale b. Mortgagee of property mortgaged; c. Mortgagor, after foreclosure but before the expiration of the period within which redemption is allowed (De Leon, 2010). 2. An inchoate interest founded on an existing interest or

A: B. Despite the designation of X as the sole beneficiary, the proceeds of the life insurance will go to the estate of Y.

Example: A stockholder has an inchoate interest in the property of the corporation of which he is a stockholder, which is founded on an existing interest arising from his ownership of shares in the corporation (De Leon, 2014).

Common-law spouses are definitely barred from receiving donations from each other. In essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is concerned. Both are founded upon the same consideration: liberality. A beneficiary is like a donee, because from the premiums of the policy which the insured pays out of liberality, the beneficiary will receive the proceeds or profits of said insurance. As a consequence, the proscription in Article 739 of the New Civil Code should equally operate in life insurance contracts. The mandate of Article 2012 cannot be laid aside: any person who cannot receive a donation cannot be named as beneficiary in the life insurance policy of the person who cannot make the donation (Insular Life Assurance, Co. vs. Ebrado, GR No. L-44059, October 28, 1977).

3. An expectancy coupled with an existing interest in that out of which the expectancy arises. NOTE: Existence of insurable interest is a matter of public policy. Hence, the principle of estoppel cannot be invoked (Sundiang, 2014).

Measure of insurable interest in property The extent to which the insured might be damnified by loss or injury thereof (Sec. 17). Insurable interest in property does not necessarily imply a property interest in, or lien upon, or possession of, the subject matter of the insurance, and neither title nor a beneficial interest is requisite to the existence thereof. It is sufficient that the insured is so situated with reference to the property that he would be liable to loss should it be injured or destroyed by the peril against which it is insured. Anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction (Gaisano Cagayan, Inc. v. Insurance Company of North America, G.R. No. 147839, June 8, 2006).

IN PROPERTY Insurable interest in property Every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that contemplated peril might directly damnify the insured, is insurable interest (Sec. 13, Insurance Code). Insurable interest in property may consist of the following:

Extent of insurable interest of a common carrier or depository in a thing held by him

1. An existing interest – The existing interest in the property may be legal or equitable title.

To the extent of his liability but not to exceed the value thereof (Sec. 15, Insurance Code) because the loss of the thing by the carrier or depository may cause liability against him to the extent of its value.

Examples of insurable interest arising from legal title: a. Trustee, as in the case of the seller of property not yet delivered; b. Mortgagor of the property mortgaged; c. Lessor of the property leased (De Leon, supra, pg. 107-108).

Effect of change of interest in any part of a thing insured unaccompanied by a corresponding change of interest in the insurance GR: A change of interest in any part of a thing insured unaccompanied by a corresponding change in

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW 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. 20; Sec.58, ibid).

Requisites of double insurance (STRIP) 1. 2. 3. 4. 5.

NOTE: “Change of interest” contemplated by law is an absolute transfer of the insured’s entire interest in the property insured to one not previously interested or insured (Perez, 2006).

Double insurance is not prohibited by law

When there is an express prohibition against alienation in the policy, in case of alienation, the contract of insurance is not merely suspended but avoided (Sundiang, 2014 citing Article 1306, NCC).

It is not contrary to law and hence, in case of double insurance, the insurers may still be made liable up to the extent of the value of the thing insured but not to exceed the amount of the policies issued (Perez, 2006).

XPNs: 1. When there is a prohibition against alienation or change of interest without the consent of the insurer in which case the policy is not merely suspended but avoided (ibid., citing Curtis vs. Girard Fire and Marine Ins., 11 SE 3, 190 Ga. 954). 2. In life, accident, and health insurance (Sec. 20, Insurance Code). 3. A change of 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 loss (Sec. 21, ibid). 4. A change of interest in one or more distinct things, separately insured by one policy does NOT avoid the insurance as to the others (Sec. 22, ibid). 5. A change of 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 (Sec. 23, ibid). 6. 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. 24, ibid). 7. When the policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owner of the interest insured (Sec. 57, ibid).

NOTE: A provision in the policy that prohibits double insurance is valid. However, in the absence of such prohibition, double insurance is allowed (ibid).

Nature of the liability of the several insurers in double insurance (2005 Bar Question) In double insurance, the insurers are considered as co-insurers. Each one is bound to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. This is known as the “principle of contribution” or “contribution clause” (Sec. 96 [e], ibid). Over insurance There is over insurance whenever the insured obtains a policy in an amount exceeding the value of his insurable interest (Perez, 2006). Double insurance v. Over insurance 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.

Two or more insurers.

DOUBLE INSURANCE AND OVER INSURANCE Double insurance Double insurance exists where the same person is insured by several insurers separately, in respect to the same subject and interest (Sec. 95, ibid).

OVER INSURANCE When the amount of the insurance is beyond the value of the insured’s insurable interest. There may be only one insurer, with whom the insured takes insurance beyond the value of his insurable interest.

Rules when the insured in a policy other than life is over insured by double insurance 1.

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Subject matter is the same Two or more insurers insuring separately Risk or peril insured against is the same Interest insured is the same Person insured is the same

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The insured, unless the policy otherwise provides, may claim payment from the insurers

INSURANCE CODE

2.

3.

4.

5.

in such order as he may select, up to the amount which the insurers are severally liable under their respective contracts; Where the policy under which the insured claims is a valued policy, any sum received by him under any other policy shall be deducted from the value of the policy without regard to the actual value of the subject matter insured; Where the policy under which the insured claims is an unvalued policy, any sum received by him under any policy shall be deducted against the full insurable value, for any sum received by him under any policy; 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. Each insurer and the other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract (Sec. 96, ibid).

A: No. The interest of Wyeth over the property subject matter of both insurance contracts is different and distinct from that of Reputable’s. The policy issued by Philippines First was in consideration of the legal and/or equitable interest of Wyeth over its own goods. On the other hand, what was issued by Malayan to Reputable was over the latter’s insurable interest over the safety of the goods, which may become the basis of the latter’s liability in case of loss or damage to the property and falls within the contemplation of Section 15 of the Insurance Code. Therefore, even though the two concerned insurance policies were issued over the same goods and cover the same risk, there arises no double insurance since they were issued to two different persons/entities having distinct insurable interests. Necessarily, over insurance by double insurance cannot likewise exist (Malayan Insurance Co., Inc., v. Philippine First Insurance Co., Inc. And Reputable Forwarder Services, Inc., G.R. No. 184300, July 11, 2012). An insurer may provide that the insured may not procure additional insurance The insurer may insert an “other insurance clause” which will prohibit double insurance. The rationale is to prevent the danger that the insured will over insure his property and thus avert the possibility of perpetration of fraud (ibid). It is lawful and specifically allowed under Sec. 75 of the Insurance Code which provides that “a policy may declare that a violation or a specified provision thereof shall avoid it, otherwise the breach of an immaterial provision does not avoid it.”

Additional or other insurance clause A clause in the policy that provides that the policy shall be void if the insured procures additional insurance without the consent of the insurer (Pioneer Insurance and Surety Corp vs. Yap, 61 SCRA 426). Q: Wyeth Philippines, Inc. (Wyeth) procured a marine policy from Philippines First Insurance Co., Inc. (Philippines First) to secure its interest over its own products while the same were being transported or shipped in the Philippines. Thereafter, Wyeth executed its annual contract of carriage with Reputable Forwarder Services, Inc. (Reputable). Under the contract, Reputable undertook to answer for all risks with respect to the goods and shall be liable to Wyeth, for the loss, destruction, or damage of the goods/products due to any and all causes whatsoever, including theft, robbery, flood, storm, earthquakes, lightning, and other force majeure while the goods/products are in transit and until actual delivery to the customers, salesmen, and dealers. The contract also required Reputable to secure an insurance policy on Wyeth’s goods. Thus, Reputable signed a Special Risk Insurance Policy (SR Policy) with Malayan Insurance Co., Inc., (Malayan) for the amount of P1,000,000.00. Is there is double insurance (as prohibited in Section 5 of the SR policy between Malayan and Reputable) so as to preclude Philippine First from claiming indemnity from Malayan?

Absence of notice of existence of other insurance constitutes fraud When the insurance policy specifically requires that notice should be given by the insured of the existence of other insurance policies upon the same property, the total absence of such notice nullifies the policy. Such failure to give notice of the existence of other insurance on the same property when required to do so constitutes deception and it could be inferred that had the insurer known that there were many other insurance policies on the same property, it could have hesitated or plainly desisted from entering into such contract (Perez, 2006). Cancellation of policy of insurance by reason of over insurance Sec. 64 of the Insurance Code of 2013 provides that upon discovery of other insurance coverage that makes the total insurance in excess of the value of the property insured, the insurer may cancel such

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW NOTE: In case of an insurance taken by the mortgagee alone and for his benefit, the mortgagee, after recovery from the insurer, is not allowed to retain his claim against the mortgagor but it passes by subrogation to the insurer to the extent of the insurance money paid (De Leon,2010).

policy of insurance; provided there is prior notice and such circumstance occurred after the effective date of the policy. Waiver of violation

The mortgagee as a beneficial payee

When the insurer, with the knowledge of the existence of other insurances, which the insurer deemed a violation of the contract, preferred to continue the policy, its action amounted to a waiver of annulment of the contract (Perez, 2006 citing Gonzales Lao v. Yek Tong Lin Fire & Marine Ins. Co., 55 Phil. 386).

The mortgagee may be made a beneficial payee through any of the following: 1. He may become the assignee of the policy with the consent of the insurer 2. He may be the mere pledgee without such consent 3. A rider making the policy payable to the mortgagee “as his interest may appear” may be attached 4. A “standard mortgage clause” containing a collateral independent contract between the mortgagee and the insurer may be attached 5. The policy, though, by its terms payable absolutely to the mortgagor; may have been procured by a mortgagor under a contract duty to insure for the mortgagee’s benefit, in which the mortgagee acquires an equitable lien upon the proceeds (ibid., pg. 75).

MULTIPLE OR SEVERAL INTERESTS ON SAME PROPERTY Instances where more than one insurable interest may exist in the same property 1. In trust, both trustor and trustee have insurable interest over the property in trust. 2. In a corporation, both the corporation and its stockholders have insurable interest over the assets. 3. In partnership both the firm and partners have insurable interest over its assets. 4. In assignment both the assignor and assignee have insurable interest over the property assigned. 5. In lease, the lessor, lessee and sub-lessees have insurable interest over the property in lease. 6. In mortgage, both the mortgagor and mortgagee have insurable interest over the property mortgaged.

Insurance procured by mortgagor for benefit of mortgagee, or policy assigned to mortgagee 1.

2.

Insurable interest of mortgagor and mortgagee in case of a mortgaged property are NOT the same Each has an insurable interest in the property mortgaged and this interest is separate and distinct from the other. Therefore, insurance taken by one in his name only and in his favor alone does not inure to the benefit of the other. The same is not open to objection that there is double insurance (RCBC vs. CA, 289 SCRA 292 [1989], Sec. 8, Insurance Code).

3.

4.

5.

Extent of insurable interest of mortgagor and mortgagee 1. Mortgagor – The mortgagor of property, as owner, has an insurable interest to the extent of its value even though the mortgage debt equals such value. 2. Mortgagee –The mortgagee as such has an insurable interest in the mortgaged property to the extent of the debt secured; such interest continues until the mortgage debt is extinguished (Sundiang, 2014). UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

The contract is deemed to be upon the interest of the mortgagor; hence he does not cease to be party to the contract; Any act of the mortgagor prior to the loss, which would otherwise avoid the insurance affects the mortgagee even if the property is in the hands of the mortgagee; Any act which under the contract of insurance is to be performed by the mortgagor may be performed by the mortgagee with the same effect; In case of loss, the mortgagee is entitled to the proceeds to the extent of his credit at the time of loss and Upon recovery by the mortgagee to the extent of his credit, the debt is extinguished (ibid., pg. 76, citing Sec. 8, Insurance Code).

NOTE: The rule on subrogation by the insurer to the right of the mortgagee does not apply in this case.

Assignment of policy to mortgagee is not a payment The assignment is merely to afford the mortgagee a greater security for the settlement of the mortgagor’s obligation and should not be construed as payment in just the same way that delivery of negotiable

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INSURANCE CODE instruments does not constitute payment until the proceeds are realized or collected (Perez, 2006).

Form of an insurance contract 1.

Effects of “mortgage redemption” procured by the mortgagor

insurance 2.

A “mortgage redemption insurance” is simply a kind of life insurance procured by the mortgagor with the mortgagee as beneficiary up to the extent of the mortgage indebtedness. Its rationale is to give protection to both the mortgagee and the mortgagor. In case the mortgagor-insured dies, the proceeds of such insurance will be applied to the payment of the mortgage debt to the mortgagee, thereby relieving the heirs of the mortgagor of the burden of paying the debt (Perez, 2006 citing Great Pacific Assur. Corp. v. Court of Appeals, et. al., G.R. No. 113899, October 13, 1999).

3.

The policy shall be in printed form which may contain blank spaces to be filled in; 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.

NOTE: Notwithstanding the foregoing, the policy may be in electronic form subject to the pertinent provisions of Republic Act No. 8792, otherwise known as the ‘Electronic Commerce Act’ and to such rules and regulations as may be prescribed by the Commissioner (Sec. 50, Insurance Code).

Standard or union mortgage clause It is a clause that states that the acts of the mortgagor do not affect the mortgagee. The purpose of the clause is to make a separate and distinct contract of insurance on the interest of the mortgagee (De Leon, supra, pg. 77).

Types of policy of insurance 1.

Open or loss-payable mortgage clause It is a clause which provides for the payment of loss, if any, to the mortgagee as his interest may appear and under it, the acts of the mortgagor affect the mortgagee (ibid).

2.

3.

In a policy obtained by the mortgagor with loss payable clause in favor of the mortgagee as his interest may appear, the mortgagee is only a beneficiary under the contract, and recognized as such by the insurer but not made a party to the contract itself. This kind of policy covers only such interest as the mortgagee has at the issuance of the policy (Sundiang, 2014, Geagonia v. CA, supra).

Open – one in which the value of the thing insured is not agreed upon, and the amount of the insurance merely represents the insurer’s maximum liability. The value of such thing insured shall be ascertained at the time of the loss (Sec. 60, Insurance Code). Valued – is one which expresses on its face an agreement that the thing insured shall be valued at a specific sum (Sec. 61, Insurance Code). Running – 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 (Sec. 62, Insurance Code).

Basic contents of a policy 1. Parties; 2. Amount of insurance, except in open or running policies; 3. Rate of premium; 4. Property or life insured; 5. Interest of the insured in the property if he is not the absolute owner; 6. Risk insured against; and 7. The period during which the insurance is to continue (Sec. 51, ibid).

PERFECTION OF A CONTRACT Policy of insurance It is the written instrument in which the contract of insurance is set forth (Sec. 49, Insurance Code.). It is the written document embodying the terms and stipulations of the contract of insurance between the insured and insurer.

Rider

NOTE: The policy is not necessary for the perfection of the contract (Sundiang, 2014).

An attachment to an insurance policy that modifies the conditions of the policy by expanding or

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW restricting its benefits or excluding certain conditions from the coverage (Black’s Law Dictionary).

NOTE: Mere submission of the application without the corresponding approval of the policy does not result in the perfection of the contract of insurance.

Riders 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 (Sec. 50, ibid). It should be countersigned by the insured or owner unless he was the one who applied for the same (Sec. 50, ibid).

Insurance contracts through correspondence follow the “cognition theory” wherein an acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge (Enriquez v. Sun Life Assurance Co. of Canada, GR No. L-15774, Nov. 29, 1920).

Q: On June 1, 2011, X mailed to Y Insurance Co. his application for life insurance. On July 21, 2011, the insurance company accepted the application and mailed, on the same day, its acceptance plus the cover note. It reached X's residence on August 11. On August 4, 2011, X figured in a car accident. He died a day later. May X's heirs recover on the insurance policy? (2011 Bar Question)

Cover notes Persons who wish to be insured may get protection before the perfection of the insurance contract by securing a cover note. The cover note issued by the insurer shall be deemed an insurance contract as contemplated under Section 1(1) of the Insurance Code subject to the following rules: 1. The cover note shall be issued or renewed only upon prior approval of the Insurance Commission; 2. The cover note shall be valid and binding for not more than sixty (60) days from the date of its issuance; 3. No separate premium (separate from the policy or main contract) is required for the cover note; 4. The cover note may be canceled by either party upon prior notice to the other of at least seven (7) days; 5. The policy should be issued within sixty (60) days after the issuance of the cover note; 6. The sixty (60)-day period may be extended upon written approval of the Insurance Commission; and 7. The written approval of the Insurance Commission is dispensed with upon the certification of the president, vice-president or general manager of the insurer that the risk involved, the values of such risks and premium therefor, have not as yet been determined or established and the extension or renewal is not contrary to or is not for the purpose of violating the Insurance Code or any rule (Sundiang, 2014).

A: No, since X had no knowledge of the insurer's acceptance of his application before he died. What is being followed in insurance contracts is what is known as the “cognition theory”. NOTE: Where the applicant died before he received notice of the acceptance of his application for the insurance, there is no perfected contract (Perez v. Court of Appeals, 323 SCRA 613).

Offer in property and liability insurance It is the insured who makes an offer to the insurer, who accepts the offer, rejects it, or makes a counter-offer. The offer is usually accepted by an insurance agent on behalf of the insurer (De Leon, 2010). Offer in life and health insurance It depends upon whether the insured pays the premium at the time he applies for insurance. 1. If he does not pay the premium, his application is considered an invitation to the insurer to make an offer, which he must then accept before the contract goes into effect. 2. If he pays the premium with his application, his application will be considered an offer (De Leon, 2010).

OFFER AND ACCEPTANCE/CONSENSUAL

DELAY IN ACCEPTANCE

Perfection of an insurance contract

Kind of acceptance that must be given

The contract of insurance is perfected when the assent or consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. Mere offer or proposal is not contemplated (De Lim v. Sun Life Assurance Co., G.R. No. L-15774, Nov. 29, 1920). UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

The acceptance of an insurance policy must be unconditional, but it need not be by a formal act (De Leon, 2010).

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INSURANCE CODE Effect of delay

PREMIUM PAYMENT

Unreasonable delay in returning the premium raises the presumption of acceptance of the insurance application (Gloria v. Philippine American Life Ins. Co., CA 73 O.G. [No.37] 8660).

Premium It is an agreed price for assuming and carrying the risk – that is, the consideration paid an insurer for undertaking to indemnify the insured against a specified peril (De Leon, 2010).

Mere delay in acceptance of the insurance application will not result in a binding contract. Court cannot impose upon the parties a contract if they did not consent. However, in proper cases, the insurer may be liable for tort (Sundiang, 2014).

Premium v. Assessment PREMIUM

DELIVERY OF POLICY Delivery is not necessary in the formation of the contract of insurance Since the contract of insurance is consensual, delivery of the policy is not necessary for its perfection (Sundiang, 2014).

1. Actual – delivery to the person of the insured. 2. Constructive a. By mail –If policy was mailed already and premium was paid and nothing is left to be done by the insured, the policy is considered constructively delivered if insured died before receiving the policy. b. By agent –If delivered to the agent of the insurer, whose duty is ministerial, or delivered to the agent of the insured, the policy is considered constructively delivered (De Leon, 2010).

meet

Premium is not a debt

Assessment when properly levied, unless otherwise expressly agreed, is a debt.

Payments in addition to regular premium An insurer may contract and accept payments, in addition to regular premium, for the purpose of paying future premiums on the policy or to increase the benefits thereof (Sec. 84, Insurance Code).

Importance of delivery

3. 4.

Collected to actual losses

1. In fire, casualty and marine insurance, the premium payable becomes a debt as soon as the risk attaches. 2. In life insurance, the premium becomes a debt only when, in the case of the first premium, the contract has become binding, and in the case of subsequent premiums, when the insurer has continued the insurance after maturity of the premium, in consideration of the insured’s express or implied promise to pay (De Leon, 2010).

Two types of delivery

2.

Levied and paid to meet anticipated losses

Instances when payment of premium becomes a debt or obligation

The mere delivery of an insurance policy to someone does not give rise to the formation of a contract in the absence of proof that he had agreed to be insured.

1.

ASSESSMENT

NOTE: This is a new provision under the Insurance Code of 2013.

It becomes the evidence of the making of a contract and of its terms; It is considered as communication of the insurer’s acceptance of the insured’s offer; It becomes the determination of policy period; It marks the end of insurer’s opportunity to decline coverage (De Leon, 2010).

Non-payment of balance of premiums does not cancel the policy A contrary rule would place exclusively in the hands of the insured the right to decide whether the contract should stand or not (Philippine Phoenix Surety & Insurance, Co., Inc., v. Woodworks, Inc., G.R. No. L-22684, Aug. 31, 1967).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Effects of non-payment of premiums Non-payment of the first premium unless waived, prevents the contract from becoming binding notwithstanding the acceptance of the application or the issuance of the policy. But nonpayment of the balance of the premium due does not produce the cancellation of the contract.

2. 3.

NOTE: But the insurer will not be deemed to have waived his privilege of forfeiture by mere inaction or silence if the ground be default in the payment of premiums, going as it does to the whole consideration inducing the insurer to enter into the contract (De Leon, 2010).

Non-payment of the subsequent premiums does not affect the validity of the contracts unless, by express stipulation, it is provided that the policy shall in that event be suspended or shall lapse (De Leon, 2010).

While the insured has the privilege of continuing the policy in force by making premium payments, the insurer cannot ordinarily force the insured to make these payments (De Leon, 2010).

NOTE: In case of individual life or endowment insurance and group life insurance, the policyholder is entitled to a grace period of either 30 days or 1 month within which the payment of any premium after the first may be made (Secs. 233[a], 234[a], Insurance Code).

Effect of acceptance of premium

In case of industrial life insurance, the grace period is 4 weeks, where premiums are payable monthly, either 30 days or 1 month (Sec. 236 [a], Insurance Code).

Acceptance of premium within the stipulated period for payment thereof, including the agreed grace period, merely assures continued effectivity of the insurance policy in accordance with its terms (Stoke v. Malayan Insurance Co., Inc., G.R. No. L-34768, Feb. 28, 1984).

Q: If the applicant failed to pay premium and instead executed a promissory note in favor of the insurer payable within 30 days which was accepted by the latter, is the insurer liable in case of loss?

Payment of the premium to agent of the insurance company is binding on it (Malayan Insurance v. Arnalo 154 SCRA 672 and areola v. CA 236 SCRA 643). If an insurance company delivers a policy to an insurance broker, it is deemed to have authorized him to receive the payment of the premium (Sec. 306, South Sea v. CA 244 SCRA 744; American Home Assurance v. Chua 309 SCRA 250).

A: Yes, the insurer is liable because there has been a perfected insurance contract. The insurer accepted the promise of the applicant to pay the insurance premium within thirty 30 days from the effective date of policy. By so doing, it has implicitly agreed to modify the tenor of the insurance policy and in effect, waived any provision therein that it would only pay for the loss or damage in case the same occurs after the payment of the premium.

An acknowledgment in a policy of the receipt of the premium is conclusive evidence of its payment for the purpose of making the policy binding despite a stipulation that it will not be binding until the premium is actually paid (Sec. 78; American Home v. Chua, supra).

Considering that the insurance policy is silent as to the mode of payment, insurer is deemed to have accepted the promissory note in payment of the premium. This rendered the policy immediately operative on the date it was delivered (Capital Insurance & Surety Co. Inc. v. Plastic Era Co., Inc. G.R. No. L-22375, July 18, 1975).

Effect of payment of premium by post-dated check Delivery of a promissory note or a check will not be sufficient to make the policy binding until the said note or check has been converted into cash. This is consistent with Article 1249 of the New Civil Code.

Rule on non-payment of premiums by reason of fortuitous event GR: Non-payment of premiums does not merely suspend but put an end to an insurance contract since the time of the payment is peculiarly of the essence of the contract (De Leon, 2010).

NOTE: Payment by means of a check or note, accepted by the insurer, bearing a date prior to the loss, assuming availability of the funds thereof, would be sufficient even if it remains unencashed at the time of the loss. The subsequent effects of encashment would retroact to the date of the instrument and its acceptance by the creditor.

XPN: 1. The insurer has become insolvent and has suspended business, or has refused without UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

justification a valid tender of premiums (Gonzales v. Asia Life Ins. Co., G.R. No. L-5188, Oct. 29, 1952). Failure to pay was due to the wrongful conduct of the insurer. The insurer has waived his right to demand payment (De Leon, 2010).

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INSURANCE CODE Non-payment of the premium will not entitle the insurer to recover the premium from the insured

(Art. 1306, NCC), and loss occurs before the expiration of the credit term (UCPB General Insurance v. Masagana Telemart, G.R. No. 137172, Apr. 4, 2001). 5. When estoppel bars the insurer to invoke non-recovery on the policy. 6. When the public interest so requires, as determined by the Insurance Commissioner

The continuance of the insurer’s obligation is conditioned upon the payment of the premium, so that no recovery can be had upon a lapsed policy, the contractual relation between the parties having ceased. If the peril insured against had occurred, the insurer would have had a valid defense against recovery under the policy.

EX: In compulsory motor vehicle insurance, if the policy was issued without payment of premium by the vehicle owner, the insurer will still be held liable. To rule otherwise would prejudice the 3rd party victim.

Q: Is the insurance company liable when a car, bought on installment basis, met an accident but the car is not yet fully paid? (2006 Bar Question)

NOTE: Under Section 77 as amended by RA 10607, a ninety (90)-day credit extension may be given whenever credit extension is given under the broker and agency agreements with duly licensed intermediaries. The requisites are as follows: 1. The credit extension must be provided for under the broker and agency agreements; 2. The credit extension to a duly licensed intermediary should not exceed ninety (90) days from date of issuance of the policy (Sundiang, 2014).

A: Yes, when insured and insurer have agreed to the payment of premium by installments and partial payment has been made at the time of loss, then the insurer becomes liable. When the car loss happened on the 5th month, the six months agreed period of payment had not yet elapsed. The owner may recover from Peninsula Insurance Company, but the latter has the right to deduct the amount of unpaid premium from the insurance proceeds.

-Employees of the Republic of the Philippines, including its political subdivisions and instrumentalities, and government-owned or -controlled corporations, may pay their insurance premiums and loan obligations through salary deduction: Provided, That the treasurer, cashier, paymaster or official of the entity employing the government employee is authorized, notwithstanding the provisions of any existing law, rules and regulations to the contrary, to make deductions from the salary, wage or income of the latter pursuant to the agreement between the insurer and the government employee and to remit such deductions to the insurer concerned, and collect such reasonable fee for its services (Sec. 78, Insurance Code). This is a new provision.

“Cash and carry” rule (2003 Bar Question) GR: No policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid. Any agreement to the contrary is void. XPN: A policy is valid and binding even when there is non-payment of premium: 1. In case of life or industrial life policy whenever the grace period provision applies, or whenever under the broker and agency agreements with duly licensed intermediaries, a ninety (90)-day credit extension is given. No credit extension to a duly licensed intermediary should exceed ninety (90) days from date of issuance of the policy (Sec. 77, Insurance Code). 2. When there is acknowledgment in a policy of a receipt of premium, which the law declares to be conclusive evidence of payment, even if there is stipulation therein that it shall not be binding until the premium is actually paid. This is without prejudice however to right of insurer to collect corresponding premium (Sec. 77, ibid). 3. When there is an agreement allowing the insured to pay the premium in installments and partial payment has been made at the time of loss (Makati Tuscany Condominium Corp. v. CA, G.R. No. 95546, Nov. 6, 1992). 4. When there is an agreement to grant the insured credit extension for the payment of the premium.

Effect of acknowledgment of receipt of premium in policy Conclusive evidence of its payment, in so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until the premium is actually paid (Sec. 79, Insurance Code). When the policy contains such written acknowledgment, it is presumed that the insurer has waived the condition of prepayment. It hereby creates a legal fiction of payment. The presumption is however, extended only to the question of the binding effect of the policy. As far as the payment of the premium itself is concerned, the acknowledgment is only a prima facie evidence of the fact of such payment. The insurer

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW may still dispute its acknowledgment but only for the purpose of recovering the premium due and unpaid. Whether payment was indeed made is a question of fact.

REINSTATEMENT OF A LAPSED POLICY OF LIFE INSURANCE Purpose of the reinstatement provision

NON-DEFAULT OPTIONS IN LIFE INSURANCE

The purpose of the provision is to clarify the requirements for restoring a policy to premium-paying status after it has been permitted to lapsed.

Devices used to prevent the forfeiture of a life insurance after the payment of the first premium 1. Grace period – After the payment of the first premium, the insured is entitled to a grace period of 30 days within which to pay the succeeding premiums (Sec. 233 [a], ibid). 2. Cash surrender value – The amount the insurer agrees to pay to the holder of the policy if he surrenders it and releases his claim upon it (Cyclopedia Law Dictionary, 3rd ed., pg. 1077). 3. Extended insurance – It is where the insured is given a right, upon default, after payment of at least three full annual premiums (see Sec. 233 [f], Insurance Code) to have the policy continued in force from the date of default for a time either stated or equal to the amount as the net value of the policy taken as a single premium, will purchase (De Leon, 2010). 4. Paid up Insurance – The insured is given a right, upon default, after the payment of at least three annual premiums to have the policy continued in force from the date of default for the whole period of the insurance without further payment of premiums (ibid). It results to a reduction of the original amount of insurance, but for the same period originally stipulated (6 Couch 2d., 355; 37 C.J.S. 364). 5. Automatic Loan Clause – A stipulation in the policy providing that upon default in payment of premium, the same shall be paid from the loan value of the policy until that value is consumed. In such a case, the policy is continued in force as fully and effectively as though the premiums had been paid by the insured from funds derived from other sources (6 Couch 2d., 383). 6. Reinstatement – Provision that the holder of the policy shall be entitled to reinstatement of the contract at anytime within 3 years from the date of default in the payment of premium, unless the cash surrender value has been paid, or the extension period expired, upon production of evidence of insurability satisfactory to the company and the payment of all overdue premiums and any indebtedness to the company upon said policy (Sec. 233 [j], Insurance Code).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Period within which the holder of the policy is entitled to reinstatement of the contract The law requires that the policy owner be permitted to reinstate the policy, subject to the violations specified, any time within three (3) years from the date of default of premium payment. A longer period, being more favorable to the insured, may be used. Reinstatement of a lapsed policy is not an absolute right of the insured Reinstatement is not an absolute right of the insured, but discretionary on the part of the insurer, which has the right to deny reinstatement if it were not satisfied as to the insurability of the insured, and if the latter did not pay all overdue premiums and other indebtedness to the insurer (McGuire vs. Manufacturer’s Life Ins. Co., 87 Phil. 370). Evidence of insurability Evidence of Insurability is broader phrase than “Evidence of Good Health” and includes such other factors as the insured’s occupation, habits, financial condition, and other risk selection factors. Q: A life insurance policy lapsed. The insured applied for reinstatement of the policy and paid only a part of the overdue premiums. Subsequently, the insured died. Was the insurer liable? A. The insurer is not liable as the policy was not reinstated. The failure to pay the balance of the overdue premiums prevented reinstatement and recovery of the face value of the policy (Andres vs. Crown Life Ins. Co., 55 O.G. 3483). Q: Eulogio took out a life insurance policy which contained a provision which allows for reinstatement any time within three years after it lapsed. Eulogio paid the premiums due on the first two months. However, he failed to pay subsequent premiums. One month after the policy lapsed, he filed an application for the reinstatement of his

96

INSURANCE CODE policy. He deposited the overdue premiums and signed a reinstatement policy stating that the payment deposit only and shall not bind the Company until this application is finally approved. Hours later, Eulogio died of electrocution. The insurance company denied the claim of his beneficiaries stating that the policy was never approved. Is the contention of the insurance company valid?

e. When rescission is granted due to insurer’s breach of contract (Sec. 74, ibid). NOTE: When the contract is voidable, a person insured is entitled to a return of the premium when such contract is subsequently annulled under the provisions of the New Civil Code. A person insured is not entitled to a return of premium if the policy is annulled, rescinded or if a claim is denied by reason of fraud (Sec. 82, Insurance Code).

A: Yes. The stipulation in a life insurance policy giving the insured the privilege to reinstate it upon written application does not give the insured absolute right to such reinstatement by the mere filing of an application. The insurer has the right to deny the reinstatement if it is not satisfied as to the insurability of the insured and if the latter does not pay all overdue premium and all other indebtedness to the insurer. After the death of the insured, the Insurance Company cannot be compelled to entertain an application for reinstatement of the policy because the conditions precedent to reinstatement can no longer be determined and satisfied.

2. Pro rata: a. When the insurance is for a definite period and the insured surrenders his policy before the termination thereof; (Sec. 80 [b], ibid); except: i. Policy not made for a definite period of time; ii. Short period rate is agreed upon; iii. Life insurance policy. b. When there is over-insurance. The premiums to be returned shall be proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk (Sec. 83). i. In case of over-insurance by double insurance, the insurer is not liable for the total amount of the insurance taken, his liability being limited to the property insured. Hence, the insurer is not entitled to that portion of the premium corresponding to the excess of the insurance over the insurable interest of the insured. ii. In case of 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 insured (Sec. 83, ibid).

Eulogio’s death, just hours after filing his Application for Reinstatement and depositing his payment for overdue premiums and interests does not constitute a special circumstance that can persuade to consider the policy reinstated. Said circumstance cannot override the clear and express provisions of the Policy Contract and Application for Reinstatement, and operate to remove the prerogative of Insular Life thereunder to approve or disapprove the Application for Reinstatement (Violeta R. Lalican vs. The Insular Life Assurance Company Limited, supra). REFUND OF PREMIUMS Instances when the insured entitled to recover premiums already paid or a portion thereof

Illustration Where there is a total over insurance of P500,000.00 in an aggregate P2,000,000.00 policy (P1,500,000.00 is only the insurable value), 25% (proportion of P500k to P2M) of the premiums paid to the several insurers should be returned.

1. Whole: a. When no part of the thing insured has been exposed to any of the perils insured against (Sec. 80). b. When the contract is voidable because of the fraud or misrepresentations of the insurer of his agent (Sec. 82, Insurance Code). c. When the insurance is voidable because of the existence of facts of which the insured was ignorant without his fault (Sec. 82, ibid). d. When the insurer never incurred any liability under the policy because of the default of the insured other than actual fraud (Sec. 82, ibid).

Instances when the insured is not entitled to return of premiums paid 1.

2.

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If the peril insured against has existed, and the insurer has been liable for any period, the peril being entire and indivisible (Sec. 81, Insurance Code); In life insurance policies (Sec. 80 [b], ibid);

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW 3. 4.

If the policy is annulled, rescinded or if a claim is denied by reason of fraud (Sec. 82, ibid); If contract is illegal and the parties are in pari delicto.

5. Physical changes in the property insured which result in the property becoming uninsurable; 6. Discovery of other insurance coverage that makes the total insurance in excess of the value of the property insured; or 7. A determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of the Insurance Code (Sec. 64, Insurance Code).

Q: Teodoro Cortez, applied for a 20-year endowment policy with Great Pacific Insurance Corporation (Great Pacific). His application, with the requisite medical examination, was accepted and approved by the Great Pacific and in due course, an endowment policy was issued in his name. Thereafter, Great Pacific advised Cortez that the policy was not in force. To make it enforceable and operative, Cortez was asked to remit the balance to complete his initial annual premium and to see Dr. Felipe V. Remollo for another full medical examination at his own expense. Because of this, Cortez informed that it that he was cancelling the policy and he demanded the return of his premium plus damages. Great Pacific ignored his demand. Is Cortez is entitled to a refund of his premium?

NOTE: No policy of insurance other than life shall be canceled 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 abovementioned instances (Sec. 64, ibid).

Notice of cancellation of the contract All notices of cancellation shall be in writing, mailed or delivered to the named insured at the address shown in the policy, or to his broker provided the broker is authorized in writing by the policy owner to receive the notice of cancellation on his behalf, and shall state: 1. Which of the grounds set forth in Section 64 is relied upon; and 2. That, upon written request of the named insured, the insurer will furnish the facts on which the cancellation is based (Sec. 65, ibid).

A: Yes. Great Pacific should have informed Cortez of the deadline for paying the first premium before or at least upon delivery of the policy to him, so he could have complied with what was needful and would not have been misled into believing that his life and his family were protected by the policy, when actually they were not. And, if the premium paid by Cortez was unacceptable for being late, it was the company's duty to return it. Since his policy was in fact inoperative or ineffectual from the beginning, the company was never at risk, hence, it is not entitled to keep the premium (Great Pacific Life Insurance Corporation v. CA, et al., G.R. No. L-57308, April 23, 1990).

CONCEALMENT Concealment Concealment is a neglect to communicate that which a party knows and ought to communicate (Sec. 26, ibid).

RESCISSION OF INSURANCE CONTRACTS

Requisites

Instances wherein a contract of insurance may be rescinded

1.

1. Concealment 2. Misrepresentation/ omission 3. Breach of warranties

2.

Instances wherein a contract of insurance may be canceled by the insurer

4.

3.

5.

1. Nonpayment of premium; 2. Conviction of a crime arising out of acts increasing the hazard insured against; 3. Discovery of fraud or material misrepresentation; 4. Discovery of willful or reckless acts or omissions increasing the hazard insured against;

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

A party knows a fact which he neglects to communicate or disclose to the other party Such party concealing is duty bound to disclose such fact to the other Such party concealing makes no warranty as to the fact concealed The other party has no means of ascertaining the fact concealed The fact must be material

Test of materiality It is 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

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INSURANCE CODE The parties are bound to know all the general causes which are open to his inquiry, equally with the other, and all general usages of trade (Sec. 32, ibid).

proposed contract, or in making his inquiries (Sec. 31, ibid). NOTE: As long as the facts concealed are material, concealment, whether intentional or not, entitles the injured party to rescind (Sec.27, ibid).

Matters that must be disclosed even in the absence of inquiry

Concealment in marine insurance

1. Those material to the contract 2. Those which the other has no means of ascertaining 3. Those as to which the party with the duty to communicate makes no warranty

Rules on concealment are stricter since the insurer would have to depend almost entirely on the matters communicated by the insured. Thus, in addition to material facts, each party must disclose all the information he possesses which are material or the information of the belief or expectation of a third person, in reference to a material fact. But concealment in a marine insurance in any of the following matters enumerated under Section 112 Insurance Code does not vitiate the entire contract, but merely exonerates the insurer from a loss resulting from the risk concealed.

NOTE: Matters relating to the health of the insured are material and relevant to the approval of the issuance of the life insurance policy as these definitely affect the insurer’s action to the application. It is well-settled that the insured need not die of the disease he had failed to disclose to the insurer, as it is sufficient that his non-disclosure misled the insurer in forming his estimates of the risks of the proposed insurance policy or in making inquiries (Sunlife Assurance Company of Canada v. CA, G.R. No. 105135, June 22, 1995). Information as to the nature of interest need not be disclosed except In property insurance, if the insured is not the owner. If somebody is insuring properties of which he is not the owner, he must disclose why he has insurable interest that would entitle him to ensure it, and the extent thereof (Secs. 34 & 51 [e], Insurance Code).

Test in ascertaining the existence of concealment If the applicant is aware of the existence of some circumstances which he knows would probably influence the insurer in acting upon his application, good faith requires him to disclose that circumstance, though unasked.

Q: Ngo Hing filed an application with the Great Pacific Life Assurance Company (Pacific Life) for a twenty-year endownment policy on the life of his one-year old daughter Helen Go. Ngo Hing supplied the essential data and filed the application to Mondragon, the branch manager. After sometime, Helen Go died of influenza with complication of bronchopneumonia. Thereupon, Ngo Hing sought the payment of the proceeds of the insurance, but having failed in his effort, he filed the action for the recovery of the same. Did Ngo Hing concealed the state of health and physical condition of Helen Go, which rendered void the binding receipt?

Matters that need not be disclosed GR: The parties are not bound to communicate information of the following matters: 1. Those which the other knows 2. 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 3. Those of which the other waives communication 4. Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material 5. Those which relate to a risk excepted from the policy and which are not otherwise material; 6. The nature or amount of the interest of one insured (except if he is not the owner of the property insured, Sec. 34, ibid).

A: Ngo Hing intentionally concealed the state of health of his daughter Helen Go. He was fully aware that his child was a typical mongoloid child upon filling out the application form. It is evident that he withheld a fact material to the risk to be assumed by the insurance company had the plan be approved. The contract of insurance is one of perfect good faith, uberrima fides, absolute and perfect candor; the absence of any concealment or demotion. Concealment is a neglect to communicate that which needs to be communicated whether intentional or unintentional. In case of concealment, the insurer is entitled to rescind the contract of insurance. In the

XPN: In answer to inquiries of the other (Sec. 30, ibid). NOTE: Neither party is bound to communicate, even upon inquiry, information of his own judgment, because such would add nothing to the appraisal of the application (Sec. 35, ibid).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW concealed is no longer material as it will no longer influence the other party to enter into such contract.

case at bar, the respondent is guilty of such concealment. Ultimately, there was no perfected contract of insurance since the conditions in the binding receipt were not complied with by the applicant (Great Pacific Life Assurance Company v. CA, G.R. No. L-31845, April 30, 1979).

Q: Joanna applied for a non-medical life insurance. Joanna did not inform the insurer that one week prior to her application for insurance, she was examined and confined at St. Luke’s Hospital where she was diagnosed for lung cancer. The insured soon thereafter died in a plane crash. Is the insurer liable considering that the fact concealed had no bearing with the cause of death of the insured? Why? (2001 Bar Question)

Right to information of material facts may be waived Right to information of material facts may be waived: 1. By the terms of the contract 2. By the failure to make an inquiry as to such facts, where they are distinctly implied in other facts from which information is communicated (Sec. 33, Insurance Code).

A: No. The concealed fact is material to the approval and issuance of the insurance policy. It is well settled that the insured need not die of the disease she failed to disclose to the insurer. It is sufficient that his nondisclosure misled the insurer in forming his estimate of the risks of the proposed insurance policy or in making inquiries (Sun Life v. CA, supra).

Rules on concealment 1.

2.

3.

4. 5.

If there is concealment under Section 27, the remedy of the insurer is rescission since concealment vitiates the contract of insurance. The party claiming the existence of concealment must prove that there was knowledge of the fact concealed on the part of the party charged with concealment. Good faith is not a defense in concealment. Concealment, whether intentional or unintentional entitles the injured party to rescind the contract of insurance (Sec. 27, ibid). The matter concealed need not be the cause of loss (Sec. 31, ibid). To be guilty of concealment, a party must have knowledge of the fact concealed at the time of the effectivity of the policy.

Instances whereby concealment made by an agent procuring the insurance binds the principal 1. Where it was the duty of the agent to acquire and communicate information of the facts in question; 2. Where it was possible for the agent, in the exercise of reasonable diligence to have made such communication before the making of the insurance contract. NOTE: Failure on the part of the insured to disclose such facts known to his agent, or wholly due to the fault of the agent, will avoid the policy, despite the good faith of the insured.

MISREPRESENTATION/OMMISSIONS

In order for concealment to produce the effect of avoiding the policy, it should take place at the time the contract is entered into

Representation An oral or written statement of a fact or condition affecting the risk made by the insured to the insurance company, tending to induce the insurer to assume the risk.

Concealment should take place at the time the contract is entered into and not afterwards in order that the policy may be avoided. The duty of disclosure ends with the completion of the contract. Waiver of medical examination in a non-medical insurance contract renders even more material the information required of the applicant concerning previous condition of health and diseases suffered, for such information necessarily constitutes an important factor which the insurer takes into consideration in deciding whether to issue the policy or not. Failure to communicate information acquired after the effectivity of the policy will not be a ground to rescind the contract.

NOTE: Representation should be made, altered or withdrawn at the time of or before the issuance of the policy. (Sec. 37, Insurance Code). It may be altered or withdrawn before the insurance is effected, but not afterwards (Sec.41, ibid).

Kinds of representation 1. 2. 3.

NOTE: The reason for this is that if concealment should take place after the contract is entered into, the information UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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Oral or written (Sec. 36, ibid); Affirmative (Sec. 42, ibid); or Promissory (Sec. 39, ibid).

INSURANCE CODE Affirmative representation

An erroneous opinion or belief will not avoid the insurance policy

Any allegation as to the existence or non-existence of a fact when the contract begins (e.g. the statement of the insured that the house to be insured is used only for residential purposes is an affirmative representation).

The statement of an erroneous opinion, belief or information, or of an unfulfilled intention, per se, will not avoid the contract of insurance, unless fraudulent.

Promissory representation

Test of materiality

Any promise to be fulfilled after the contract has come into existence or any statement concerning what is to happen during the existence of the insurance.

It 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 representation is made, in forming his estimates of the disadvantages of the proposed contract or in making his inquiries (similar with concealment) (Sec. 46, ibid).

Misrepresentation

Effects of misrepresentation

Misrepresentation is an affirmative defense. To avoid liability, the insurer has the duty to establish such a defense by satisfactory and convincing evidence (Ng Gan Zee v. Asian Crusader Life Assn. Corp., G.R. No. L30685, May 30, 1983). [See also Sec. 44 (when the facts fail to correspond to the assertions or stipulations), Insurance Code].

1. It renders the insurance contract voidable at the option of the insurer, although the policy is not thereby rendered void ab initio. The injured party entitled to rescind from the time when the representation becomes false; 2. When the insurer accepted the payment of premium with the knowledge of the ground for rescission, there is waiver of such right; 3. There is no waiver of the right of rescission if the insurer had no knowledge of the ground therefor at the time of acceptance of premium payment.

NOTE: In the absence of evidence that the insured has sufficient medical knowledge to enable him to distinguish between “peptic ulcer” and “tumor”, the statement of deceased that said tumor was “associated with ulcer of the stomach” should be considered an expression in good faith. Fraudulent intent of insured must be established to entitle insurer to rescind the insurance contract. Misrepresentation, as a defense of insurer, is an affirmative defense which must be proved (Ng Gan Zee v. Asian Crusader Life Assn. Corp., G.R. No. L- 30685, May 30, 1983).

Effect of collusion between the insurer’s agent and the insured It vitiates the policy even though the agent is acting within the apparent scope of his authority. The agent ceases to represent his principal. He, thus, represents himself; so the insurer is not estopped from avoiding the policy.

Requisites of misrepresentation 1. 2.

3.

The insured stated a fact which is untrue; Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively as true without knowing it to be true and which has a tendency to mislead; Such fact in either case is material to the risk.

Characteristics of representation 1.

NOTE: A representation cannot qualify an express provision in a contract of insurance but it may qualify an implied warranty (Sec. 40, Insurance Code).

2. 3. 4.

Representation as to a future undertaking

5.

A representation as to the future is to be deemed a promise unless it appears that it was merely a statement of belief or an expectation that is susceptible to present, actual knowledge (Sec. 39, ibid).

Not a part of the contract but merely a collateral inducement to it Oral or written Made at the time of, or before issuing the policy and not after Altered or withdrawn before the insurance is effected but not afterwards Must be presumed to refer to the date the contract goes into effect (Sec. 42, ibid).

Similarities of concealment and representation 1.

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Both refer to the same subject matter and both take place before the contract is entered. UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW 2.

3. 4. 5.

6.

Concealment or representation prior to loss or death gives rise to the same remedy; that is rescission or cancellation. The test of materiality is the same (Secs. 31, 46, ibid). The rules of concealment and representation are the same with life and non-life insurance. Whether intentional or not, the injured party is entitled to rescind a contract of insurance on ground of concealment or false representation. Since the contract of insurance is said to be one of utmost good faith on the part of both parties to the agreement, the rules on concealment and representation apply likewise to the insurer.

the lifetime of the insured for a period of two (2) years from the date of its issue or 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 (Sundiang, 2014 citing Sec. 48, Insurance Code; Florendo v. Philam Plans, G.R. No. 186983, February 22, 2012). Defenses that are not barred by incontestability clause

Concealment v. Misrepresentation CONCEALMENT The insured withholds the information of material facts from the insurer

MISREPRESENTATION The insured makes erroneous statements of facts with the intent of inducing the insurer to enter into the insurance contract

Application of concealment and misrepresentation in case of loss or death GR: If the concealment or misrepresentation is discovered before loss or death, the insurer can cancel the policy. If the discovery is after loss or death, the insurer can refuse to pay.

The following defenses are not barred by the incontestability clause: 1. That the person taking the insurance lacked insurable interest as required by law; 2. That the cause of the death of the insured is an excepted risk; 3. That the premiums have not been paid (Secs. 77, 233[b], 236[b], Insurance Code); 4. That the conditions of the policy relating to military or naval service have been violated (Secs. 233[b], 234[b], ibid); 5. That the fraud is of a particularly vicious type; 6. That the beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened; or 7. That the action was not brought within the time specified (Sundiang, 2014). Remedy of the misrepresentation

injured

party

in

case

of

XPN: The incontestability clause under paragraph 2 of Section 48.

If there is misrepresentation, the injured party is entitled to rescind from the time when the representation becomes false.

XPN to XPN: (i.e., when the contract may be rescinded even beyond the incontestability period)

Exercise of the right to rescind the contract The right to rescind must be exercised previous to the commencement of an action on the contract (the action referred to is that to collect a claim on the contract) (Sec.48, par.1, Insurance Code).

1. Non-payment of premiums. 2. Violation of condition (Secs. 233 [b], 234 [b], ibid). 3. No insurable interest 4. Cause of death was excepted or not covered 5. Fraud of a vicious type 6. Proof of death was not given (Sec. 248, ibid). 7. That the conditions of the policy relating to military or naval service (Secs. 233 [b], 234 [b], ibid). 8. That the action was not brought within the time specified (Sec. 63, ibid).

Omission The failure to communicate information of matters proving or tending to prove the falsity of warranty. In case of omission, the aggrieved party may rescind the contract of insurance.

Incontestability clause After the policy of life insurance made payable on the death of the insured shall have been in force during UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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INSURANCE CODE BREACH OF WARRANTIES

Warranty v. Representation

Warranties

WARRANTY Considered parts of the contract. Always written on the face of the policy, actually or by reference. Must be strictly complied with. Its falsity or non-fulfillment operates as a breach of contract.

Statements or promises by the insured set forth in the policy itself or incorporated in it by proper reference, the untruth or non-fulfillment of which in any respect, and without reference to whether the insurer was in fact prejudiced by such untruth or non-fulfillment render the policy voidable by the insurer. Purpose of warranties To eliminate potentially increasing moral or physical hazards which may either be due to the acts of the insured or to the change of the condition of the property.

Presumed material.

REPRESENTATION Collateral inducement to the contract. May be written in a totally disconnected paper or may be oral. Only substantial proof is required. Its falsity renders the policy void on the ground of fraud. Insurer must show its materiality in order to defeat an action on the policy.

Basis of warranties

Effects of breach of warranty

The insurer took into consideration the condition of the property at the time of effectivity of the policy.

1. Material GR: Violation of material warranty or of material provision of a policy will entitle the other party to rescind the contract.

Kinds of warranties 1. Affirmative warranty – one which relates to matters which exist at or before the issuance of the policy. 2. Promissory warranty – one in which the insured undertakes that something shall be done or omitted after the policy takes effect and during its continuance. 3. Express warranty – a statement in a policy, of a matter relating to the person or thing insured, or to the risk, as a fact. 4. Implied warranty – an agreement or stipulation not expressed in the policy but the existence of which is admitted or presumed from the fact that the contract of insurance has been executed.

XPN:(with regard to “promissory” warranties) 1. Loss occurs before the time of performance of the warranty; 2. The performance becomes unlawful at the place of the contract; and 3. Performance becomes impossible (Sec. 73, ibid). 2. Immaterial GR: It will not avoid the policy. XPN: When the policy expressly provides or declares that a violation thereof will avoid it. For instance, an “Other Insurance Clause” which is a condition in the policy requiring the insured to inform the insurer of any other insurance coverage of the property. A violation of the clause by the insured will not constitute a breach unless there is an additional provision stating that the violation thereof will avoid the policy (Sec. 75, ibid).

Peculiar only to marine insurance, and therefore is deemed included in the contract, although not expressly mentioned: a. That the ship will not deviate from the agreed voyage unless deviation is proper b. That the ship will not engage in illegal venture c. Warranty of neutrality, that the ship will carry the requisite documents of nationality or neutrality where such nationality or neutrality is warranted d. Presence of insurable interest e. That the ship is seaworthy at the time of the commencement of the insurance contract.

Effect of a breach of warranty without fraud The policy is avoided only from the time of breach (Sec. 76, ibid) and the insured is entitled: 1. To the return of the premium paid at a pro rata from the time of breach or if it occurs after the inception of the contract; or 2. To all premiums if it is broken during the inception of the contract.

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW CLAIMS SETTLEMENT AND SUBROGATION

Instances when the defects in the notice or proof of loss are considered waived (MaJoR-DeW)

NOTICE AND PROOF OF LOSS

When the insurer: 1. Writes to the insured that he considers the policy null and void as the furnishing of notice or proof of loss would be useless; 2. Recognizes his liability to pay the claim; 3. Denies all liability under the policy 4. Joins in the proceedings for determining the amount of the loss by arbitration, making no objections on account of notice and preliminary proof; or 5. Makes Objection on any ground other than the formal defect in the preliminary proof.

Loss in insurance The injury, damage or liability sustained by the insured in consequence of the happening of one or more of the perils against which the insurer, in consideration of the premium, has undertaken to indemnify the insured. It may be total, partial, or constructive in marine insurance. Conditions before the insured may recover on the policy after the loss

Instances when delay in the presentation of notice or proof of loss deemed waived

1. The insured or some person entitled to the benefit of the insurance, without unnecessary delay, must give written notice to the insurer (Sec. 90, ibid); 2. When required by the policy, insured must present a preliminary proof loss which is the best evidence he has in his power at the time (Sec. 91, ibid).

If caused by: 1. Any act of the insurer; and 2. By failure to take objection promptly and specifically upon that ground (Sec. 93, ibid).

NOTE: For other non-life insurance, the Commissioner may specify the period for the submission of the notice of loss (Sec. 90, Insurance Code).

Proof of loss It is the more or less formal evidence given the company by the insured or claimant under a policy of the occurrence of the loss, the particulars thereof and the data necessary to enable the company to determine its liability and the amount thereof.

Notice of loss It is the more or less formal notice given the insurer by the insured or claimant under a policy of the occurrence of the loss insured against.

Time for payment of claims LIFE POLICIES 1. Maturing upon the expiration of the term– the proceeds are immediately payable to the insured, except if proceeds are payable in installments or annuities which shall be paid as they become due.

Purposes of notice of loss 1. To give insurer information by which he may determine the extent of his liability; 2. To afford the insurer a means of detecting any fraud that may have been practiced upon him; and 3. To operate as a check upon extravagant claims. Effect of failure to give notice of loss FIRE INSURANCE Failure to give notice defeats the right of the insured to recover.

OTHER TYPES OF INSURANCE Failure to give notice will not exonerate the insurer, unless there is a stipulation in the policy requiring the insured to do so.

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

2. Maturing at the death of the insured, occurring prior to the expiration of the term stipulated – the proceeds are payable to the beneficiaries within 60 days after presentation of claim and filing of proof of death (Sec. 248, Insurance Code).

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NON-LIFE POLICIES

The proceeds shall be paid within 30 days after the receipt by the insurer of proof of loss and ascertainment of the loss or damage by agreement of the parties or by arbitration but not later than 90 days from such receipt of proof of loss, whether or not ascertainment is had or made (Sec. 249, Insurance Code).

INSURANCE CODE GUIDELINES ON CLAIMS SETTLEMENT

UNFAIR CLAIMS SETTLEMENT; SANCTIONS

Claim Settlement

Unfair settlement practices (MAI-GL)

Claim settlement is the indemnification of the suffered by the insured. The claimant may be the insured or reinsured, the insurer who is entitled to subrogation, or a third party who has a claim against the insured.

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

Purpose of the rule To eliminate unfair claim settlement practices. Rules in claim settlement 1.

2.

No insurance company doing business in the Philippines shall refuse, without justifiable cause, to pay or settle claims arising under coverages provided by its policies, nor shall any such company engage in unfair claim settlement practices. Evidence as to numbers and types of valid and justifiable complaints to the Commissioner against an insurance company, and the Commissioner’s complaint experience with other insurance companies writing similar lines of insurance shall be admissible in evidence in an administrative or judicial proceeding brought under this section (Sec. 247 (b), ibid).

Sanction for the insurance companies which engaged to unfair settlement practices The suspension or revocation of an insurance company’s certificate of authority (Sec 247).

Claims settlement in life insurance

Effect of refusal or failure to pay the claim within the time prescribed

1. The proceeds shall be paid immediately upon the maturity of the policy if there is such a maturity date. 2. If the policy matures by the death of the insured, within sixty (60) days after presentation of the claim and filing of the proof of the death of the insured (Sundiang, 2014; Section 248, ibid).

The insurer shall be liable to pay interest twice the ceiling prescribed by the Monetary Board on the proceeds of the insurance from the date following the time prescribed under the Insurance Code, until the claim is fully satisfied (Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc. G. R. No. 151890, June 20, 2006).

Claims settlement in property insurance

NOTE: Refusal or failure to pay the loss or damage will entitle the assured to collect interest UNLESS such refusal or failure to pay is based on the ground that the claim is fraudulent.

1.

2.

Proceeds shall be paid within thirty (30) days after proof of loss is received by the insurer and ascertainment of the loss or damage is made either by agreement or by arbitration. If no ascertainment is made within sixty (60) days after receipt of proof of loss, the shall be paid within ninety (90) days after such receipt (Sundiang, 2014; Sec. 249, ibid).

Where the mortgagor and the mortgagee were both claiming the proceeds of a fire insurance policy and the creditors of the mortgagor also attached the proceeds, the insurance company cannot be held liable for damages for withholding payment since the delay was not malevolent (Rizal Commercial Bank Corporation v. Court of Appeals, 289 SCRA 293).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW PRESCRIPTION OF ACTIONS

Prescriptive period in motor vehicle insurance

Rules on the prescriptive period for filing an insurance claim

It is one year from denial of the claim and not from the date of the accident.

1. The parties to a contract of insurance may validly agree that an action on the policy should be brought within a limited period of time, provided such period is not less than 1 year from the time the cause of action accrues. If the period agreed upon is less than 1 year from the time the cause of action accrues, such agreement is void (Sec. 63, Insurance Code). a. The stipulated prescriptive period shall begin to run from the date of the insurer’s rejection of the claim filed by the insured or beneficiary and not from the time of loss. b. In case the claim was denied by the insurer but the insured filed a petition for reconsideration, the prescriptive period should be counted from the date the claim was denied at the first instance and not from the denial of the reconsideration (Sun Life Office, Ltd. vs. CA, GR. No. 89741, Mar 13, 1991). 2. If there is no stipulation or the stipulation is void, the insured may bring the action within 10 years in case the contract is written. 3. In a comprehensive motor vehicle liability insurance (CMVLI), the written notice of claim must be filed within 6 months from the date of the accident; otherwise, the claim is deemed waived even if the same is brought within 1 year from its rejection (Vda. De Gabriel vs. CA, GR No. 103883, Nov 14, 1996). 4. The suit for damages, either with the proper court or with the Insurance Commissioner, should be filed within 1 year from the date of the denial of the claim by the insurer, otherwise, claimant’s right of action shall prescribe (Sec. 397, Insurance Code).

SUBROGATION Principle of Subrogation If the plaintiff’s property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract (Art. 2207, NCC). NOTE: The principle of subrogation 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 private contract. Payment to the insured makes the insurer a subrogee in equity (Malayan Insurance Co., Inc. v. CA, G.R. No. L-36413, Sept. 26, 1988). Incapacity of the insured will not affect the capacity of the subrogee because capacity is personal to the holder (Lorenzo Shipping v. Chub and Sons, Inc., G.R. No. 147724, June 8, 2004).

Purposes of subrogation 1. 2. 3.

To make the person who caused the loss legally responsible for it. To prevent the insured from receiving double recovery from the wrongdoer and the insurer. To prevent the tortfeasors from being free from liability and is thus founded on consideration of public policy.

Rules on subrogation Q. From what time shall the period of prescription be computed in case the insured asked for reconsideration of the denial of claim? (1996 Bar Question)

1.

A: In case the claim was denied by the insurer but the insured file a petition for reconsideration, the prescriptive period should be counted from the date the claim was denied at the first instance and not from the denial of the reconsideration. To rule otherwise would give the insured a scheme or devise to waste time until any evidence which may be considered against him is destroyed (Sun life Office, Ltd. vs. CA, 195 SCRA 193).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

2.

Applicable only to property insurance – the value of human life is regarded as unlimited and therefore, no recovery from a third party can be deemed adequate to compensate the insured’s beneficiary. The right of insurer against a third party is limited to the amount recoverable from latter by the insured.

Rules on indemnity 1. Applies only to property insurance except when the creditor insures the life of his debtor. 2. Insurance contracts are not wagering contracts or gambling contracts.

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INSURANCE CODE When amount paid by the insurance company does not fully cover the injury or loss

Q: Malayan Insurance Company issued a car insurance policy in favor of First Malayan Leasing and Finance Corporation (the assured), insuring a Mitsubishi Galant against third party liability, own damage and theft, among others. Unfortunately, Mitsubishi Galant encountered a vehicular accident at the corner of EDSA and Ayala Avenue, Makati. The accident involves a Nissan Bus operated by Aladdin Transit, an Isuzu Tanker, and a Fuzo Cargo Truck. Because of this, Malayan Insurance was constrained to pay the assured of the damages sustained by it. Maintaining that it has been subrogated to the rights and interests of the assured, Malayan Insurance sent several demand letters to Rodelio Alberto (Alberto) and Enrico Alberto Reyes (Reyes), the registered owner and the driver, respectively, of the Fuzo Cargo Truck, requiring them to pay the amount it had paid to the assured. No settlement of liability was made, thus, Malayan Insurance filed a complaint for damages for gross negligence against Alberto, et al., Is Malayan Insurance entitled to the right of subrogation?

The aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury (Art. 2207, NCC). Instances where the right of subrogation does not apply 1.

2.

3.

4. 5. 6.

Where the insured by his own act releases the wrongdoer or third party liable for loss or damage from liability The insurer loses his rights against the wrongdoer since the insurer can only be subrogated to only such rights as the insured may have Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith settled the insured claim for loss Where the insurer pays the insured for a loss or risk not covered by the policy Life insurance For recovery of loss in excess of insurance coverage

A: Yes. The payment by the insurer to the insured operates as an equitable assignment to the insurer of all the remedies that the insured may have against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract. It accrues simply upon payment by the insurance company of the insurance claim (Malayan Insurance Co., Inc., v. Rodelio Alberto, et al., G.R. No. 194320, February 1, 2012).

NOTE: Since the insurer can be subrogated to only such rights as the insured may have, should the insured, after receiving payment from the insurer, release the wrongdoer who caused the loss, the insurer loses his rights against the latter. But in such a case, the insurer will be entitled to recover from the insured whatever it has paid to the latter, unless the release was made with the consent of the insurer (Manila Mahogany Manufacturing Corporation v. Court of Appeals, 154 SCRA 650, citing Campos and Campos, NOTES AND SELECTED CASES ON INSURANCE LAW 492 (1960)).

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MERCANTILE LAW Test for determining whether or not one is a common carrier (1996 Bar Exam Question)

TRANSPORTATION LAW Laws that govern contracts of transportation

The test for determining whether or not one is a common carrier is whether the person or entity, for some business purpose and with general or limited clientele, offers the service of carrying or transporting passengers or goods or both for compensation.

Contracts of transportation, whether by land, sea or air, if within the Philippines or if the transportation of goods be from a foreign country to the Philippines shall be governed by the following laws, arranged by order of application: 1. Provisions of the New Civil Code on “Common Carriers”; 2. Code of Commerce; and 3. Special laws such as Carriage of Goods by the Sea (COGSA); Salvage Law; Public Service Act; Land Transportation and Traffic Code; Tariff and Customs Code; and Civil Aeronautics Act (NCC, Art. 1735 and 1766; American President Lines, Ltd. vs. Klepper, GR No. L-15671, November 29, 1960).

It is not required that the carrier’s principal activity is carriage of persons or goods in order to be a common carrier Article 1732 makes no distinction between one whose principal business activity is the carrying of persons or goods or both, and one who does such carrying only as an ancillary activity (in local idiom, as “a sideline”). Article 1732 also carefully avoids making any distinction between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such services on a an occasional, episodic or unscheduled basis. Neither does Article 1732 distinguish between a carrier offering its services to the “general public,” i.e., the general community or population, and one who offers services or solicits business only from a narrow segment of the general population. Article 1733 deliberately refrained from making such distinctions (Perez, 2009 ed., citing Caltex [Phils.] vs. CA, GR No. 131166, September 30, 1999).

NOTE: In the case of international carriage in Air Transportation, Warsaw Convention applies (ibid). If the goods are to be transported from Philippines to foreign country, the law of the latter country shall govern the transportation contract (ibid).

COMMON CARRIERS Requisites for an entity to be classified as a common carrier (PBL-FP)

Q: AM Trucking, a small company, operates two trucks for hire on selective basis. It caters only to a few customers, and its trucks do not make regular or scheduled trips. It does not even have a certificate of public convenience. On one occasion, Reynaldo contracted AM to transport for a fee, 100 sacks of rice from Manila to Tarlac. However, AM failed to deliver the cargo, because its truck was hijacked when the driver stopped in Bulacan to visit his girlfriend. a. May Reynaldo hold AM liable as a common carrier? b. May AM set up the hijacking as a defense to defeat Reynaldo‘s claim?

1. Must be a Person, corporation, firm or association 2. Must be engaged in the Business of carrying or transporting passengers or goods or both 3. The carriage or transport must either be by Land, water or air 4. The service is for a Fee 5. The service is offered to the Public (Art. 1732, NCC). NOTE: A pipeline operator who carries oil and other petroleum products through pipes/ pipelines is a common carrier. The law does not distinguish as to the means by which transportation is carried out, as long as it is by land, water or air. Neither does the law require that transportation be through a motor vehicle (J. Dimaampao, supra, pg. 125, citing First Phil. Industrial Pipeline, supra).

A: a) Reynaldo may hold AM Trucking liable as a common carrier. The facts that AM Trucking operates only two trucks for hire on a selective basis, caters only to a few customers, does not make regular or scheduled trips, and does not have a certificate of public convenience are of no moment as: 1. The law does not distinguish between one whose principal business activity is the carrying of persons

The operator of a school bus is a common carrier because he holds himself out indiscriminately as ready to transport students of a particular school living within or near the area where he operates the service and for a fee (J. Dimaampao, ibid., pg. 126, citing Perena case, supra).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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TRANSPORTATION LAWS or goods or both and anyone who does such carrying only as an ancillary activity, 2. the law avoids making any distinction between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such service on an occasional, episodic or unscheduled basis, and 3. the law refrains from making a distinction between a carrier offering its services to the general public and one who offers services or solicits business only from a narrow segment of the general population (Pedro de Guzman v CA L-47822 Dec 22,88 168s612)

not liable therefore because he is not a common carrier under the Civil Code and, even granting for the sake of argument that he is, he is not liable for the occurrence of the loss as it was due to a cause beyond his control. If you were the judge, would you sustain the contention of Alejandro? A: If I were the Judge, I would hold Alejandro as having engaged as a common carrier. A person who offers his services to carry passengers or goods for a fee is a common carrier regardless of whether he has a certificate of public convenience or not, whether it is his main business or incidental to such business, whether it is scheduled or unscheduled service, and whether he offers his services to the general public or to a limited few (De Guzman v CA GR 47822, 27 Dec 1988).

b) AM Trucking may not set up the hijacking as a defense to defeat Reynaldo‘s claim as the facts given do not indicate that the same was attended by the use of grave or irresistible threat, violence, or force. It would appear that the truck was left unattended by its driver and was taken while he was visiting his girlfriend (Pedro de Guzman v CA L-47822 Dec 22,88 168 scra 612).

I will however, sustain the contention of Alejandro that he is not liable for the loss of the goods. A common carrier is not an insurer of the cargo. If it can be established that the loss, despite the exercise of extraordinary diligence, could not have been avoided, liability does not ensue against the carrier. The hijacking by 3 armed men of the truck used by Alejandro is one of such cases (De Guzman v CA GR 47822 27Dec1988).

Q: Alejandor Camaling of Alegria, Cebu, is engaged in buying copra, charcoal, firewood, and used bottles and in reselling them in Cebu City. He uses 2 big Isuzu trucks for the purpose; however, he has no certificate of public convenience or franchise to do business as a common carrier. On the return trips to Alegria, he loads his trucks with various merchandise of other merchants in Alegria and the neighboring municipalities of Badian and Ginatilan. He charges them freight rates much lower than the regular rates. In one of the return trips, which left Cebu City at 8:30 p.m. 1 cargo truck was loaded with several boxes of sardines, valued at P100th, belonging to one of his customers, Pedro Rabor. While passing the zigzag road between Carcar and Barili, Cebu, which is midway between Cebu City and Alegria, the truck was hijacked by 3 armed men who took all the boxes of sardines and kidnapped the driver and his helper, releasing them in Cebu City only 2 days later.

Private carrier A carrier which does not qualify under the requisites of a common carrier is deemed a private carrier (National Steel Corporation v CA, G.R. No. 112287, December 12, 1997). A private carrier is one who, without making the activity a vocation, or without holding himself or itself out to the public as ready to act for all who may desire his or its services, undertakes, by special agreement in a particular instance only, to transport goods or persons from one place to another either gratuitously or for hire (Spouses Perena vs. Spouses Zarate, GR No. 157917, August 29, 2012).

Pedro Rabor sought to recover from Alejandro the value of the sardines. The latter contends that he is Common carrier v. Private carrier

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW To whom does the carrier cater its service

Governing laws

Degree of Diligence required Presumption of Negligence

Whether subject to regulation or not Exemption from liability

COMMON CARRIER Undertakes to carry passengers or goods for the public (First Philippine Industrial Pipeline vs. CA, 300 SCRA 661).

Civil Provisions on Common Carriers, Public Service Act, and other special laws relating to transportation (Spouses Perena vs. Spouses Zarate, supra). Extraordinary diligence (Art. 1733, NCC).

1. If the goods are lost, destroyed or deteriorated. 2. In case of death of or injuries to passengers (Art. 1735 and 1756, NCC). Subject to regulation by a regulatory agency

A common carrier cannot stipulate that it is exempt from liability for negligence of its agents or employees. Such stipulation is void as it is against public policy (Sundiang, 2014).

Name two (2) characteristics which differentiate a common carrier from a private carrier (2002 Bar Exam Question)

Ordinary diligence or diligence of a good father of the family (Spouses Perena v. Spouses Zarate, supra). No presumption as to negligence (Planters Products vs. CA, GR No. 101503, Sept. 15, 1993). NOT subject to regulation by a regulatory agency

A private carrier may validly enter into such stipulation (Sundiang, 2014).

business purposes, any common carrier, with or without fixed route and whatever may be its classification, engaged in the transportation of passengers or freight or both, canal, irrigation system, gas, electric light, heat and power, water supply power, petroleum, sewerage system, wire or wireless communication systems, wire or wireless broadcasting stations and stations and other similar public services (Public Service Act [PSA], Sec. 13 [b]).

Two (2) characteristics that differentiate a common carrier from a private carrier are: 1. A common carrier offers its service to the public; a private carrier does not. 2. A common carrier is required to observe extraordinary diligence; a private carrier is not so required.

A casual or incidental service devoid of public character and interest is not brought within the category. The question depends on such factors as the extent of services, whether such person or company has held himself or itself out as ready to serve the public or a portion of the public generally (Luzon Stevedoring v. PSC, G.R. L-5458, September 16 1953).

Public utility A business or service engaged in supplying the public with some commodity or service of public consequence, or essential to the general public (Perez, 2006, citing Albano vs. Reyes, 175 SCRA 264; KMU Labor Center vs. Garcia, 239 SCRA 386).

NOTE: The terms “public utility” and “public service” are used interchangeably (Perez, 2006).

Public service

Certificate of public convenience (CPC)

Every person that may own, operate, manage, control in the Philippines, for hire/compensation, with general/limited clientele whether permanent, occasional or accidental, and done for general UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

PRIVATE CARRIER Carriage is generally undertaken by special agreement and it does not hold itself out to carry goods for the general public (Loadmasters Customs Services, Inc. vs. Glodel Brokerage G.R. No. 179446, January 10, 2011). Civil Code provisions on ordinary contracts (ibid).

It is an authorization issued for the operation of public services for which no franchise, either

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TRANSPORTATION LAWS municipal or legislative, is required by law, such as a common carrier.

2.

Certificate of public convenience is not necessary before a carrier can be considered a common carrier

3. 4.

A person or entity is a common carrier even if he did not secure CPC. Its liability as a common carrier arises as soon as it acted as a common carrier, without regard as to whether or not such carrier has complied with the requirements of the applicable regulatory statute and implementing regulations and has been granted a certificate of public convenience or other franchise (De Guzman v CA. 168 SCRA 612 [1988]).

Grounds that oppositors may raise to the application for a certificate of public convenience 1. The area has already a well-established operator – Prior operator rule (Mandbusco, Inc. vs. Francisco, 32 SCRA 405).

Certificate of public convenience (CPC) v. Certificate of public convenience and necessity (CPCN) CPC Issued whenever the Public Service Commission (Commission) finds that the operation of the proposed public service will promote the public interests in a proper and suitable manner, for which a municipal or legislative franchise is NOT necessary (Sec. 16 [a], PSA).

Prior Operator or Old Operator Rule The rule allows an existing franchised operator to invoke a preferential right within the authorized territory as long as he renders satisfactory and economical service (Martin, 1989 Ed.). The prior operator must first be given the opportunity to extend its service in order to meet public needs in the matter of transportation (ibid).

CPCN Issued upon approval of any franchise or privilege granted by any political subdivision of the Philippines when in the judgment of the political subdivision of the Philippines when in the judgment of the Commission such franchise or privilege will properly conserve the public interest (Sec. 16 [b], PSA).

Third Operator Rule On the other hand, under the Third Operator Rule, where two operators are more than serving the public there is no reason to permit a third operator to engage in competition with them. The fact that it is only one trip and of little consequence is not sufficient reason to grant the application (Yangco v. Esteban, G.R. No. 38586, Aug. 18, 1933).

Instances where a certificate of public convenience is not necessary (WAR-PIPA) 1. 2. 3. 4. 5. 7.

8.

Warehouses Animal-drawn vehicles or banca powered by oar or by sail; tug boats and lighters Radio companies, except as to fixing of rates Public market Ice plants Public utilities operated by the national government or Political subdivision except as to rates. Airships except as to fixing rates

2. Where there are various applicants for a public utility over the same territory, all conditions being equal, priority in the filing of the application for CPC becomes a factor – Prior applicant rule. Prior Applicant Rule It presupposes a situation when two interested persons apply for a certificate to operate a public utility in the same community over which no person has as yet granted any certificate (Martin, 1989, Ed.).

Requirements for the grant of certificate of public convenience (COPS) 1.

Applicant must prove the Operation of proposed public service will promote public interest in a proper and suitable manner. Applicant must prove Public necessity. Applicant must have Sufficient financial capability to undertake proposed services and meeting responsibilities incidental to its operation (KMU Labor Center vs. Garcia, supra).

3. Interpose an objection stating that the grant of the application would result to a ruinous competition (Halili vs. Ice and Cold Storage Industries, Inc., 77 Phil. 823). One of the purposes of PSA is to protect and conserve the investments which have already been

Applicant must be a Citizen of the Philippines. If the applicant is a Corporation, 60% of its capital must be owned by Filipinos.

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW made for that purpose by public service operators – Protection of investment rule (Batangas Trans. Co. vs. Orlanes, 52 Phil. 455).

Q: Bayan Bus Lines had been operating satisfactorily a bus service over the route Manila to Tarlac and vice versa via the McArthur Highway. With the upgrading of the new North Expressway, Bayan Bus Lines service became inadequate despite its efforts of improving the same. Pasok Transportation, Inc. now applies for the issuance to it by the Land Transportation Franchising and Regulatory Board of a certificate of public convenience for the same Manila-Tarlac-Manila route. Could Bayan Bus Lines, Inc. invoke the prior operator rule against Pasok Transportation, Inc.? Why? (2003 Bar Question)

NOTE: Mere possibility of reduction in the income of an existing operator holding a public service permit does not, of itself, establish that issuing a permit to another to operate within the same territory will result in ruinous competition. To prove the latter, it should be shown that the oppositor will not obtain sufficient profits to pay a dividend or reasonable interest upon invested capital (Halili vs. Ice and Cold Storage Industries, Inc., supra).

A: No, Bayan Bus Lines Inc. cannot invoke the prior operator rule. As a general principle, public utility operators must be protected from ruinous competition, such that before permitting a new operator to serve in a territory already served by another operatior, the latter should first be given an opportunity to improve his equipment and service. This principle, however, is subject to justifiable exceptions. The primary consideration in the grant of a certificate of public convenience must always be public convenience. (Fortunato F. Halili v. Ruperto Cruz, G.R. No. L-21061) In this case, Bayan Bus Lines had been given an opportunity to improve its service but despite its efforts, its services still proved inadequate which rendered the need to avail of the services of Pasok Transportation, Inc. as the addition would better serve public convenience, which is the paramount consideration in the granting of a certificate of public convenience.

4. Attack the citizenship of the applicant (Sec. 11, Art. XII of the 1987 Constitution prohibits the granting of franchise or certificate for the operation of public utility in favor of non-Filipino citizens); or 5. The applicant does not have the necessary financial capacity (KMU Labor Center vs. Garcia, supra). Exceptions to the application of Prior operator rule or Protection of investment rule 1.

Where public interest would be better served by the new operator (Intestate Estate of Teofilo Tiongson vs. Commission, 36 SCRA 241). 2. Where the old operator has failed to make an offer to meet the increase in traffic (Manila Yellow Taxicab Co., Inc. vs. Castelo, GR No. L-131910, May 30, 1960). 3. Where the certificate of public convenience granted to the new operator is a maiden certificate, which does not overlap with the entire route of the old operator but only a short portion thereof as a convergence point (Mandbusco, Co. vs. Francisco, supra). 4. If the application of the rule will be conducive to monopoly of the service, and contrary to the principle that promotes healthy competition (Villa Rey Transit, Inc. vs. Pangasinan Trans. Inc., 5 SCRA 234). 5. If the old operator unjustifiably abandoned his service for two or three years by not registering the necessary equipment forfeits his right to said equipment and the service authorized to him (Fariñas vs. Estate of Florencio Buan, GR No. 12306-7, November 29, 1961). 6. The service of the prior operator is inefficient. 7. The prior operator denies that there is a need to expand his service. 8. The prior operator has abandoned his service. 9. The prior operation is operating less units than he was authorized. 10. The prior operator was given the opportunity to expand his service and failed to do so. UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

100% foreign corporation may own facilities and equipment of a public utility such as EDSA LRT III While the Constitution requires that a franchise is needed for the operation of public utility and that no franchise shall be granted to corporation without at least 60% of its capital owned by Filipinos, it does not require however, a franchise before one can own the facilities needed to a public utility. The right to operate a public utility may exist independently and separately from the ownership of the facilities thereof. One can own facilities without operating them as a public utility, or conversely one may operate a public utility without owning the facilities (Tatad et al. v Sec. Garcia and EDSA LRT Corp Ltd., April 16, 1995). Certificate of public convenience does not confer upon the holder any proprietary right or interest in the route covered thereby A CPC does not confer upon the holder any proprietary right in the route covered thereby (Luque

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TRANSPORTATION LAWS v. Villegas, G.R. No. L-22545, November 28, 1969). However, with respect to other persons and other public utilities, a CPC as property, which represents the right and authority to operate its facilities for public service, cannot be taken or interfered with without due process of law. Appropriate actions may be maintained in courts by the holder of the certificate against those who have not been authorized to operate in competition with the former and those who invade the rights which the former has pursuant to the authority granted by the Commission (A.L. Animen Transportation Co. v. Golingco, G.R. No. 17151, April 6, 1922).

2. The vehicle was driven without his knowledge or consent (ibid., pg. 138, citing Duavit vs. CA, [1989] and Duquillo vs. Bayot, [1939]). Note: The registered owner cannot exculpate himself from vicarious liability by proving who the supposed transferee or owner is (ibid., pg. 139, citing Orix Metro Leasing vs. Mangalinao, [2012]).

DILIGENCE REQUIRED Diligence required of common carriers The diligence required of common carriers is extraordinary diligence (Art. 1733, NCC). The nature of the business of common carriers and the exigencies of public policy demand that they observe extraordinary diligence (Martin, 1989 Ed.).

Under the PSA, a CPC can be sold by the holder thereof because it has considerable material value and is considered a valuable asset (Raymundo v. Luneta Motor Co., G.R. No. 39902, November 29, 1933). It is a “property” and and it can be the subject of sale or attachment (Cogeo-Cubao Operators and Drivers Association v. CA, 207 SCRA 3433, Raymundo v. Luneta Motor Co.).

It is that extreme measure of care and caution which persons of unusual prudence and circumspection use for securing and preserving their own property or rights. The law requires common carriers to render service with the greatest skill and utmost foresight (Loadmasters Services vs. Glodel Brokerage, supra.).

Approval by the Commission of the sale, encumbrance or lease of property is not a condition precedent to the validity of a contract

Reason for the requirement of extra-ordinary diligence

While in the old law, the sale without the approval of the Public Utility Commission was declared null and void, under PSA, the new law, the sale may not only be negotiated but completed before said approval. In other words, the approval by the Commission is not a condition precedent to the validity of the contract. The approval is only necessary to protect public interest (Darang vs. Belizar, G.R. No. L-19487, January 31, 1967).

1. 2.

Nature of the business of common carrier which is public service; Public policy, the common carriers are supposed to serve the public interest and therefore, they have to exercise extra-ordinary diligence (Martin, 1989 Ed.).

Q: Why is the defense of due diligence in the selection and supervision of an employee not available to a common carrier? (2002 Bar Exam Question)

However, in case the registered owner leased to another a vehicle being used for public service, the former will still be liable to a customer whose goods were misappropriated by the latter if there was no approval of the PSC since the lease is not binding upon the parties (Galisan v. Alday, 154 SCRA 388).

A: The defense of due diligence in the selection and supervision of an employee is not available to a common carrier because the degree of diligence required of a common carrier is not the diligence of a good father of a family but extraordinary diligence, i.e., diligence of the greatest skill and utmost foresight.

Liability of a holder of Certificate of Public Convenience GR: The holder of the CPC (registered owner) is primarily and vicariously liable for the negligent operation of the vehicle (ibid., pg. 138; Art. 2176, in relation to Art. 2180, NCC; Filcar Transport vs. Espinas, [2012]).

Duration for the exercise of extraordinary diligence by the common carrier in connection to the transfer of goods It 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

XPNs: The registered owner is not liable if: 1. The vehicle was taken or stolen from his garage;

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW the consignee, or to the person who has a right to receive them (Art. 1736, NCC).

or to the person who has a right to receive them. (Art. 1736, NCC)

NOTE: Thus, this duty remains in full force and effect even when they are temporarily unloaded or stored in transit, unless the shipper or owner had made use of the right or stoppage in transit (Art. 1737, NCC).

Note: This duty remains in full force and effect even when they are temporarily unloaded or stored in transit, unless the shipper or owner had made use of the right or stoppage in transit (Art. 1737, NCC).

However, this extraordinary liability 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 been reasonable opportunity thereafter to remove them or otherwise dispose of them (Art. 1738, NCC). Hence, where the consignee failed to claim a machinery after its arrival and the carrier deposited it in a warehouse, the carrier is not liable for the damages sustained by the machinery after its delivery to the warehouse (Sea-Land Service, Inc. v.CA, 223 SCRA 316).

It also continues 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 been given a reasonable opportunity thereafter to remove them or otherwise dispose of them (Art. 1738, NCC)

Duration for the exercise of extraordinary diligence by the common carrier in connection to transportation of passengers The duty of the common carrier commence from the moment the person who purchases the ticket from the carrier presents himself at the proper place and in a proper manner to be transported. The relation of carrier and passenger continues until the passenger has been landed at the port of destination and has left the vessel owner's dock or premises. Once created, the relationship will not ordinarily terminate until the passenger has, after reaching his destination, safely alighted from the carrier's conveyance or had a reasonable opportunity to leave the carrier's premises (Aboitiz Shipping Corp. v. CA, G.R. No. 84458, Nov. 6, 1989).

GR: There is a presumption of negligence if the goods are lost, destroyed or deteriorated (Art. 1735, NCC) XPNs: 1. Natural disaster or calamity which is the proximate cause of the loss (flood, storm, earthquake, lightning) 2. Acts of public enemy in war, whether international or civil; 3. Act of omission of the shipper or passenger; 4. Character of the goods or defects in the packing or container; 5. Order or act of competent public authority; 6. Exercise of extraordinary diligence. The carrier and shipper may agree on the observance of diligence to a degree less than extraordinary (but not total exemption), provided the stipulation is:

Exercise of extraordinary diligence in the carriage of goods v. Exercise of extraordinary diligence in the transport of passengers EXTRAORDINARY DILIGENCE in Carriage of Goods Transport of Passengers Commences from the Commences from the time the goods are moment the person who unconditionally placed in purchases the ticket the possession of, and from the carrier received by the carrier for presents himself at the transportation (Art. 1736, proper place and in a NCC). proper manner to be transported (Aboitiz Shipping Corp. vs. CA [1989]). Continues until the goods Continues until the are delivered, actually or passenger has been constructively, by the landed at the port of carrier to the consignee, destination and has left UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

the vessel owner’s dock or premises (Aboitiz, supra).

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There is a presumption of negligence if there is death or injuries to passengers (Art. 1756, NCC)

Cannot be dispensed with or lessened by stipulation.

TRANSPORTATION LAWS convicted and it turns out that he is insolvent, the heirs/ passengers may run after the employer of the driver, pursuant to the employer’s subsidiary liability under Article 103, in relation to Arts. 100 and 102, RPC.

(1) In writing; (2) Supported by a valuable consideration other than service rendered by the carrier; and (3) Reasonable, just and not contrary to public policy (J. Dimaampao, supra, pg. 137) Q: X, while driving his Toyota Altis, tried to cross the railway tract of Philippine (xxx line 2 unread text xxx) approached Blumentritt Avenida Ext., applied its horn as a warning to all the vehicles that might be crossing the railway tract, but there was really nobody manning the crossing. X was listening to his lpod touch, hence, he did not hear the sound of the horn of the train and so his car was hit by the train. As a result of the accident, X suffered some injuries and his car was totally destroyed as a result of the impact. Is PNR liable? (2012 Bar Question)

CAUSE OF ACTION OF THE INJURED PASSENGER OR HIS HEIRS, IF THE PASSENGER DIES: Against the negligent driver

In all cases other than those mentioned in Nos. 1, 2, 3, 4, and 5 of Article 1734 of the NCC, if the goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have acted negligently (Art. 1735, NCC). Presumption of negligence in the transportation of passengers In case of death of or injuries to passengers, common carriers are presumed to have been at fault or to have acted negligently (Art. 1756, NCC). Presumption of negligence is rebuttable Both articles 1735 and 1756 of the NCC provides that such presumption may be refuted by proving observance of extraordinary diligence as prescribed by article 1733 of the NCC. Q: Peter so hailed a taxicab owned and operated by Jimmy Cheng and driven by Hermie Cortez. Peter asked Cortez to take him to his office in Malate. On the way to Malate, the taxicab collided with a passenger jeepney, as a result of which Peter was injured, i.e., he fractured his left leg. Peter sued Jimmy for damages, based upon a contract of carriage, and Peter won. Jimmy wanted to challenge the decision before the SC on the ground that the trial court erred in not making an express finding as to whether or not Jimmy was

BASIS OF CAUSE OF ACTION

Culpa criminal If

the

driver

Subsidiary liability

Presumption of negligence in the carriage of goods

BASIS OF CAUSE OF ACTION AGAINST THE COMMON CARRIER Tort (extra-contractual negligence) Breach of the contract of carriage (Culpa Contractual) Breach of the contract of carriage (Culpa Contractual)

Note:

Against the common carrier at fault

LIABILITIES OF COMMON CARRIER

Causes of action for failure to observe diligence required

Third person who suffered damages Shipper of the goods damaged Heir/s of the deceased passengers or the passenger himself for the injuries sustained by him

Tort

Note: The liability of the common carrier and his driver as well as the operator of the other vehicle and his driver is joint and several (J. Dimaampao, citing Tiu vs. Arriesgado [2004]).

A: PNR is liable because Railroad companies owe to the public a duty of exercising a reasonable degree of care to avoid injury to person and property at railroad crossings which means a flagman or a watchman should have been posted to warn the public at all times.

PERSON WHO HAS CAUSE OF ACTION

Against the carrier and driver operating the other vehicle at fault

is

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MERCANTILE LAW NOTE: Although the relation of passenger and carrier is "contractual both in origin and nature" nevertheless “the act that breaks the contract may be also a tort" when said act is done with gross negligence or with bad faith (Air France v Carrascoso, G.R. No. L-21438, September 28, 1966).

responsible for the collision and, hence, civilly liable to Peter. He went to see you for advice. What will you tell him? Explain. (1990 Bar Exam Question) A: I will counsel Jimmy to desist from challenging the decision. The action of Peter being based on culpa contractual, the carrier‘s negligence is presumed upon the breach of contract. The burden of proof instead would lie on Jimmy to establish that despite an exercise of utmost diligence the collision could not have been avoided.

Q: Vivian Martin was booked by PAL, which acted as a ticketing agent of Far East Airlines, for a round trip flight on the latter‘s aircraft, from Manila-Hongkong-Manila. The ticket was cut by an employee of PAL. The ticket showed that Vivian was scheduled to leave Manila at 5:30 p.m. on 05 January 2002 aboard Far East‘s Flight F007. Vivian arrived at the Ninoy Aquino International Airport an hour before the time scheduled in her ticket, but was told that Far East‘s Flight F007 had left at 12:10 p.m. It turned out that the ticket was inadvertently cut and wrongly worded. PAL employees manning the airport‘s ground services nevertheless scheduled her to fly two hours later aboard their plane. She agreed and arrived in Hongkong safely. The aircraft used by Far East Airlines developed engine trouble, and did not make it to Hongkong but returned to Manila. Vivian sued both airlines, PAL and Far East, for damages because of her having unable to take the Far East flight. Could either or both airlines be held liable to Vivian? Why? (2003 Bar Exam Question)

Q: In a court case involving claims for damages arising from death and injury of bus passengers, counsel for the bus operator files a demurrer to evidence arguing that the complaint should be dismissed because the plaintiffs did not submit any evidence that the operator or its employees were negligent. If you were the judge, would you dismiss the complaint? (1997 Bar Exam Question) A: No. In the carriage of passengers, the failure of the common carrier to bring the passengers safely to their destination immediately raises the presumption that such failure is attributable to the carrier‘s fault or negligence. In the case at bar, the fact of death and injury of the bus passengers raises the presumption of fault or negligence on the part of the carrier. The carrier must rebut such presumption. Otherwise, the conclusion can be properly made that the carrier failed to exercise extraordinary diligence as required by law.

A: Vivian can hold neither liable. PAL acted merely as a ticketing agent, consequently, there was no breach of contract on its part for which Vivian can hold it liable. At best, the act of PAL’s employees in inadvertently detaching the ticket and the ticket’s erroneous wordings were acts of negligence. Also, PAL sought to accommodate Vivian immediately by scheduling her to fly two hours later. As to Far East Airlines, Vivian cannot hold it liable because as held in Japan Airlines v. Court of Appeals, et al. (G.R. No. 118664), airline passengers must take such risks incident to the mode of travel and that common carriers are not insurers of all risks. Due to the technical makeup of an airplane, engine troubles may be considered as some of the perils involved in air travel.

Moral damages in case of breach of contract of transportation GR: Moral damages are not recoverable in breach of contract of transportation because such contract cannot be considered included in the “analogous cases” used in Article 2219 of the NCC. This is likewise to consider that Art. 2176 of the NCC expressly excludes the cases where there is a “pre-existing contractual relation between the parties” (Versoza vs. Baytan, et al., 107 Phil. 1010). XPNs: Moral damages may be recovered even in case of breach of contract of transportation in the following cases: 1. Where the mishap results in the death of the passenger (M. Ruiz Highway Transit, Inc. vs. CA, 11 SCRA 98). 2. Where it is proved that the carrier was guilty of fraud or bad faith, even if death does not result (Rex Taxicab Co. vs. Bautista, GR No. L-15392, September 30, 1960). UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Boundary system Under this system the driver is engaged to drive the owner/operator’s unit and pays the latter a fee commonly called boundary for the use of the unit. Whatever he earned in excess of that amount is his income (Paguio Transport Corp. v. NLRC, G.R. No. 119500, August 28, 1998). The gasoline consumed by the jeep is for the account of the driver (National

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TRANSPORTATION LAWS Labor Union v. Dinglasan, G.R. No. L-14183, Nov. 4, 1993).

a. X as the owner is exempt from liability because he was not the one driving. b. X as the owner is exempt from liability because precisely the arrangement is one under the "boundary system." c. X will not be exempt from liability because he remains to be the registered owner and the boundary system will not allow the circumvention of the law to avoid liability. d. Y is the only one liable because he drove recklessly.

Relationship between the owner of the vehicle and the driver under a boundary system arrangement The relationship between jeepney owners/ operators on one hand and jeepney drivers on the other under the boundary system is that of employer-employee and not of lessor-lessee (Martinez v. NLRC, G.R. No. 117495, May 29, 1997). The owner of the public vehicle operating under the boundary system is not exempt from liability in a case of injury to or death of passengers

A: C. X will not be exempt from liability because he remains to be the registered owner and the boundary system will not allow the circumvention of the law to avoid liability.

To exempt from liability the owner of a public vehicle who operates it under the “boundary system” on the ground that he is a mere lessor would be not only to abet flagrant violations of the PSA, but also to place the riding public at the mercy of reckless and irresponsible drivers. Moreover, due care in the selection of employees is called for by Article 2180 of the Civil Code. Failing on this, the owner of the vehicle, who is likewise the employer, shall not be exempt from liability (Hernandez vs. Dolor, 435 SCRA 668, July 30, 2004).

Kabit system The kabit system is an arrangement whereby a person who has been granted a CPC allows other persons who own motor vehicles to operate them under his license, sometimes for a fee or percentage of the earnings (Lim v CA, G.R. No. 125817, January 16, 2002). NOTE: Although not outrightly penalized as a criminal offense, the kabit system is invariably recognized as being contrary to public policy and therefore, void and inexistent under Art. 1409 of the New Civil Code. It is a fundamental principle that the court will not aid either party to enforce an illegal contract, but will leave them both where it finds them (Lita Enterprises, Inc. v. IAC, G.R. No. 64693, April 27, 1984).

Q: Baldo is a driver of Yellow Cab Company under the boundary system. While cruising along the South Expressway, Baldo‘s cab figured in a collision, killing his passenger, Pietro. The heirs of Pietro sued Yellow Cab Company for damages, but the latter refused to pay the heirs, insisting that it is not liable because Baldo is not its employee. Resolve with reasons. (2005 Bar Exam Question)

The registered owner of the vehicle may not be allowed to prove that there is already a transfer of ownership to another person under the kabit system

A: Yellow Cab Company shall be liable with Baldo, on a solidary basis, for the death of passenger Pietro. Baldo is an employee of Yellow Cab under the boundary system. As such, the death of passenger Pietro is breach of contract of carriage, making both the common carrier Yellow Cab and its employee, Baldo, solidarily liable (Hernandez v. Dolor, G.R, No. 160286, July 30, 2004).

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

Q: X owns a fleet of taxicabs. He operates it through what is known as boundary system. Y drives one of such taxicabs and pays X a fixed amount of Php1 ,000 daily under the boundary system. This means that anything above Php1 ,000 would be the earnings of Y. Y, driving recklessly, hit an old lady crossing the street. Which statement is most accurate? (2012 Bar Question)

If a registered owner is allowed to escape liability by proving who the supposed owner of the vehicle is, it would be easy for him to transfer the subject vehicle to another who possesses no property with which to respond financially for the damage done (Lim v. CA, supra).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Q: Can the grantee of CPC engaged in a “kabit system” be held liable for damages arising from the crime of reckless imprudence resulting to the death and injuries to third persons, to which the driver was convicted?

records of the Land Transportation Franchising and Regulatory Board, Enteng remained its registered owner and operator. One day, while the jeepney was traveling southbound, it collided with a ten-wheeler truck owned by Emmanuel. The driver of the truck admitted responsibility for the accident, explaining that the truck lost its brakes.

A: Yes. The driver, the operator, and the real owner of the vehicle are jointly and severally liable for damages. However, the registered owner or operator has the right to be indemnified by the real or actual of the amount that he may be required to pay as damage for the injury caused. Recovery by the registered owner or operator may be made in any form—either by a cross-claim, third party complaint, or an independent action, and the result is the same (Perez, 2009, citing Jereos vs. CA, 117 SCRA 395l Zamboanga Trans. Co. vs. CA, 30 SCRA 718).

Procopio sued Emmanuel for damages, but the latter moved to dismiss the case on the ground that Procopio is not the real party in interest since he is not the registered owner of the jeepney. Resolve the motion with reasons. (2005 Bar Exam Question) A: The motion to dismiss should be denied because Procopio, as the real owner of the jeepney, is the real party in interest. Procopio falls under the Kabit system. However, the legal restriction as regards the Kabit system does not apply in this case because the public at large is not deceived nor involved (Lim v. Court of Appeals, G.R. No. 125817, January 16, 2002, citing Baliwag Transit v. Court of Appeals, G.R. No. 57493, January 7, 1987).

Q: Johnny owns a Sarao jeepney. He asked his neighbor Van if he could operate the said jeepney under Van‘s certificate of public convenience. Van agreed and, accordingly, Johnny registered his jeepney under Van name. On June 10, 1990, one of the passenger jeepneys operated by Van bumped Tomas. Tomas was injured and in due time, he filed a complaint for damages against Van and his driver for the injuries he suffered. The court rendered judgment in favor of Tomas and ordered Van and his driver, jointly and severally, to pay Tomas actual and moral damages, attorney‘s fees, and costs.

In any event, Procoprio is deemed to be "the agent" of the registered owner. (First Malayan Leasing v. Court of Appeals, G.R. No. 91378, June 9,1992; and "F" Transit Co., Inc. v. NLRC, G.R. Nos, 88195-96, January 27, 1994)

The Sheriff levied on the jeepney belonging to Johnny but registered in the name of Van. Johnny filed a 3rd party claim with the Sheriff alleging ownership of the jeepney levied upon and stating that the jeepney was registered in the name of Van merely to enable Johnny to make use of Van‘s certificate of public convenience. May the Sheriff proceed with the public auction of Johnny‘s jeepney. Discuss with reasons. (1990 Bar Exam Question)

Q: X owns a passenger jeepney covered by Certificate of Public Convenience. He allowed Y to use its Certificate of Convenience for a consideration. Y therefore was operating the passenger jeepney under the same Certificate of Public Convenience (Kabit System) under the name of X. The passenger jeepney met an accident. Who will be liable? (2012 Bar) A: X and Y will be jointly and severally liable.

A: Yes, the Sheriff may proceed with the auction sale of Johnny‘s jeepney. In contemplation of law as regards the public and third persons, the vehicle is considered the property of the registered operator (Santos v Sibug 104 S 520).

VIGILANCE OVER GOODS EXEMPTING CAUSES Presumption on the deterioration of goods

Q: Procopio purchased an Isuzu passenger jeepney from Enteng, a holder of a certificate of public convenience for the operation of public utility vehicle plying the Calamba-Los Baños route. While Procopio continued offering the jeepney for public transport services, he did not have the registration of the vehicle transferred in his name. Neither did he secure for himself a certificate of public convenience for its operation. Thus, per the UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

loss,

destruction,

or

GR: The common carrier is presumed to have been at fault or to have acted negligently when the goods transported are lost, destroyed or deteriorated (Art. 1735, NCC). XPNs: When the same is due to any of the following causes only: (FA2 – C O)

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TRANSPORTATION LAWS 1. Fortuitous events (Flood, storm, earthquake, lightning or other natural disaster or calamity). Provided, the following conditions are present: a. Natural disaster was the proximate and only cause; b. Carrier exercised due diligence to prevent or minimize loss before, during and after the occurrence of the natural disaster; and c. The common carrier has not negligently incurred delay in transporting the goods (NCC, Art. 1739-1740). d. The common carrier exercised due diligence to prevent or minimize the loss before, during or after its occurrence. 2. Act of the public enemy in war, whether international or civil, provided: a. Act was the proximate and only cause; and b. Carrier exercised due diligence to prevent or minimize loss before, during and after the act (NCC, Art. 1739-1740). 3. Act or omission of the shipper or owner of the goods, provided: a. If proximate and only cause – exempting b. If contributory negligence – mitigating 4. The Character of the goods or defects in the packing or in the containers; provided, carrier exercised due diligence to forestall or prevent loss (Art 1742).

4.

Mechanical defects are not considered fortuitous events Mechanical defects in the carrier are NOT considered a caso fortuito that exempts the carrier from responsibility (Sweet Lines, Inc. v. CA, GR No. L-46340, Apr. 29, 1983). Other SC decisions on the matter are: 1. Tire blowout of a jeep is not a fortuitous event where there exists a specific act of negligence by the carrier consisting of the fact that the jeepney was overloaded and speeding at the time of the incident (Juntilla v. Fontanar, GR No. L-45637, May 31, 1985). 2. Defective brakes cannot be considered fortuitous in character (Vergara v. CA, G.R. No. 77679, September 30, 1987). Occurrence of a typhoon as a fortuitous event GR: If all the elements of a natural disaster or calamity concur and there was no contributory negligence or delay, the occurrence of a typhoon as a fortuitous event. This holds true especially if the vessel was seaworthy at the time it undertook that fateful voyage and that it was confirmed with the Coast Guard that the weather condition would permit safe travel of the vessel to its destination (Philippine American General Insurance Co., Inc. v. MGG Marine Services, Inc., G.R. No. 135645, March 8, 2002).

NOTE: If the fact of improper packing is known to the carrier or its servants, or apparent upon ordinary observation, but it accepts the goods notwithstanding such condition, it is not relieved from responsibility for loss or injury resulting therefrom (Southern Lines Inc., v. CA, GR No. L-16629, January 31, 1962).

The loss of cargoes due to the sinking of a seaworthy tugboat which was suddenly tossed by waves of extraordinary height is due to a force majeure (Philippine American Gloeneral Insurance Company v. PKS Shipping Company, 401 SCRA 222).

5. Order or act of competent authority; provided, the authority is with power to issue the order (Art. 1743). If the officer acts without legal process, the common carrier will be held liable (Ganzon vs. CA, GR No. L-48757, May 30, 1988).

XPN: If a vessel sank due to a typhoon, and there was failure to ascertain the direction of the storm and the weather condition of the path they would be traversing, it constitutes lack of foresight and minimum vigilance over its cargoes taking into account the surrounding circumstances of the case. Thus, the common carrier will still be liable (Arada v. CA, G.R. No. 98243, July 1, 1992).

NOTE: In all cases other than those enumerated above, there is presumption of negligence even if there is an agreement limiting the liability of the common carrier in the vigilance over the goods.

REQUIREMENT OF ABSENCE OF NEGLIGENCE

However, where a vessel encountered stormy weather and the coils of wire it was transporting became rusty because rain entered the hatch of the vessel, the damage was not due to a fortuitous event, because heavy rains are foreseeable and rain would not have entered the hatch if it was closed properly (Eastern Shipping Lines v. CA, 196 SCRA 570).

Requisites of a fortuitous event (FEU-I) 1. 2.

3.

The cause of the breach of obligation must be Independent of the will of the debtor (Real vs. Belo, GR No. 146224, January 26, 2007).

The debtor must be Free from any participation in or aggravation of the injury to the creditor. The Event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner. The event must be Unforeseen or unavoidable.

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Fire is not considered a natural disaster

bean meal from Manila Port Area to Calamba, Laguna. To carry out faithfully its obligation Dizon subcontracted with Enrico Reyes the delivery of 400 sacks of the Soya bean meal. Aside from the driver, three male employees of Reyes rode on the truck with the cargo. While the truck was on its way to Laguna two strangers suddenly stopped the truck and hijacked the cargo. Investigation by the police disclosed that one of the hijackers was armed with a bladed weapon while the other was unarmed. For failure to deliver the 400 sacks, Fairgoods sued Dizon for damages. Dizon in turn set up a 3rd party complaint against Reyes which the latter registered on the ground that the loss was due to force majeure. Did the hijacking constitute force majeure to exculpate Reyes from any liability to Dizon? Discuss fully. (1995 Bar Exam Question)

This must be so as it arises almost invariably from some act of man or by human means. It does not fall within the category of an act of God UNLESS caused by lightning or by other natural disaster or calamity. It may even be caused by the actual fault or privity of the carrier (Eastern Shipping Lines v. IAC, GR No. L-69044, May 29, 1987). But if the outbreak of fire is due to a crack in the auxiliary engine fuel oil service truck, which resulted in the loss of cargoes, that is not due to a force majeure but to negligence (Edgar Cokaliong Shipping Lines, Inc. v. UCPB General Insurance Company, Inc., 404 SCRA 706). NOTE: In case that the goods have been already deposited in the warehouse of Bureau of Customs then the goods was destroyed by fire, the carrier is not anymore liable (Servando vs. Philippine Steam Navigation, GR No. L-36481-2, October 23, 1982).

A: No. The hijacking in this case cannot be considered force majeure. Only one of the two hijackers was armed with a bladed weapon. As against the 4 male employees of Reyes, 2 hijackers, with only one of them being armed with a bladed weapon, cannot be considered force majeure. The hijackers did not act with grave or irresistible threat, violence or force.

Common carrier’s liability for the acts of strangers or criminals GR: A common carrier is liable even for acts of strangers like thieves or robbers.

ABSENCE OF DELAY

XPN: Where such thieves or robbers acted "with grave or irresistible threat, violence or force." The common carrier is not liable for the value of the undelivered merchandise which was lost because of an event that is beyond his control (De Guzman v. CA, supra).

Rules regarding the time of delivery of goods and delay 1. If there is an agreement as to time of delivery – delivery must be within the time stipulated in the contract or bill of lading. 2. If there is no agreement – delivery must be within a reasonable time (Saludo, Jr. v. CA, G.R. No. 95536, March 23, 1992).

When an airline company was not authorized to search passengers for firearms, the loss of the jewelry and cash of a passenger because of an armed robbery committed by other passengers is a force majeure, for which the airline company is not liable (Quisumbing v. CA, 190 SCRA 605).

Liability of the carrier if there is delay in the delivery of goods

A bus operator is not liable for the injury suffered by a passenger when a bystander stoned the bus, because a common carrier is not liable for the injury of passengers caused by strangers over whom it had no control and the bus operator is only responsible if the bus operator could have prevented such injury by the exercise of the diligence of a good father of a family, for the bus operator is not an isurer of the absolutely safety of passengers (Pilapil v. CA, 180 SCRA 548).

The carrier shall be liable for damages immediately and proximately resulting from such neglect of duty (ibid.; NCC, Art. 1170). However, where the delay in the transportation of the remains of a deceased persons was due to the fault of the mortuary service, who erroneously switched the casket with that of another deceased person, the airline company cannot be held liable for damages because of the delay (Saludo v. CA, 207 SCRA 498).

Q: M. Dizon Trucking entered into a hauling contract with Fairgoods Co whereby the former bound itself to haul the latter‘s 2000 sacks of Soya UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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TRANSPORTATION LAWS Although the delivery of the suitcase of a passenger was delayed by eleven days, an airline company cannot be held liable for moral damages, exemplary damages, and attorney’s fees, where the airline company was not guilty of bad faith and exerted efforts in tracing the suitcase (Philippine Air Lines v. Mano, 242 SCRA 235).

common carrier must exercise due diligence to forestall or lessen the loss. CONTRIBUTORY NEGLIGENCE Contributory negligence Contributory negligence is the failure of a person who has been exposed to injury by the fault or negligence of another, to use such degree of care for his safety and protection an ordinarily prudent man would use under the circumstances (Martin, 1989, citing Rakes vs. Atlantic Gulf Co., 7 Phil. 359).

Effect to the limited liability in case of an unjust delay in the transportation of goods or a deviation from stipulated or usual route 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 (Art. 1747, NCC).

Contributory negligence on the part of the passenger does not justify the common carrier’s exemption from liability (Martin, 1989, Ed.). Rule if there is contributory negligence on the part of the shipper

A stipulation limiting the common carrier’s liability for delay on account of riots is valid

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 for damages, which however, shall be equitably reduced (Art. 1741, NCC).

An agreement limiting the common carrier’s liability for delay on account of strikes or riots is valid (Art. 1748, NCC). DUE DILIGENCE TO PREVENT LOSS Duty of the common carrier before, during and after a natural disaster or acts of a public enemy as contemplated under Article 1734 of the NCC

DURATION OF LIABILITY DELIVERY OF GOODS TO A COMMON CARRIER

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 or an act of a public enemy in order that the common carrier may be exempted from liability for the loss, destruction or deterioration of the goods (Art. 1739, NCC).

Duration of the extraordinary responsibility of the common carrier It 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 (NCC, Art. 1736).

NOTE: This exemption from liability also requires that the common carrier must prove that the natural disaster or the act of the public enemy is the proximate and only cause of the loss (ibid.). Further, if the common carrier negligently incurs delay in transporting the goods, a natural disaster shall not free such carrier from responsibility (Art. 1740, NCC).

Meaning of the phrasse “Unconditionally placed in the possession of, and received by the carrier for transportation” It is the delivery of the goods to the carrier for immediate transportation, that is, as soon as the delivery is complete so as to place on the carrier the exclusive duty of seeing after their safety (Perez, 2006 citing Charles J. Webb & Sons vs. Central R. Co. of NJ, 36 F. 2d 702).

Duty of the common carrier if the loss, destruction, or deterioration of the goods was caused by the character of the goods, or the faulty nature of the packing or the containers If the loss, destruction, or deterioration of the goods was caused by the character of the goods, or the faulty nature of the packing or the containers, The

NOTE: When the goods are unconditionally placed in the possession and control of the common carrier, and upon their receipt by the carrier for transportation, the contract of carriage was deemed perfected. The fact that part of the

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MERCANTILE LAW shipment had not been loaded on board the lighter did not impair the said contract of transportation as the goods remained in the custody and control of the carrier, albeit still unloaded (Ganzon vs. CA, supra).

such misdelivery (Smith, Bell & Co. [Phils.] vs. Gimenez, 8 SCRA 407 [1963]). TEMPORARY UNLOADING OR STORAGE

Liability governed by Philippine law even if cargo was transhipped

Right of stoppage in transitu It is the right exercised by the seller by stopping the delivery of the goods to a certain buyer or consignee (because of insolvency) when such goods are already in transit (Art. 1530, NCC).

The liability of a shipping company for damage to cargo it shipped to Davao City is governed by Philippine law even if the cargo was transshipped to the United States, because as against the first shipping company, Davao City was the destination (Lorenzo Shipping Corporation v. Chubb and Sons, Inc., 431 SCRA 266).

NOTE: The seller may exercise this right either by obtaining actual possession of the goods or by giving notice of his claim to the carrier or other bailee in whose possession the goods are. Such notice may be given either to the person in actual possession of the goods or to his principal. In the latter case, the notice, to be effectual, must be given at such time and under such circumstances that the principal, by the exercise of reasonable diligence, may prevent a delivery to the buyer (Art. 1532, NCC).

The execution of a receipt or bill of lading is not required for the commencement of the responsibility to observe extraordinary diligence The requirement to observe extraordinary diligence begins with the actual delivery of the goods for transportation, and not merely with the formal execution of a receipt or bill of lading; the issuance of a bill of lading is not necessary to complete delivery and acceptance by the carrier (Compania Maritima v. Insurance Co. of North America, G.R. No. L-18965, October 30, 1964).

Rule as to unloading, storage and stoppage in transitu GR: The common carrier’s duty to observe extraordinary diligence in the vigilance over the goods remains in full force and effect even when they are temporarily unloaded or stored in transit.

ACTUAL OR CONSTRUCTIVE DELIVERY XPN: When the shipper or owner has made use of the right of stoppage in transitu (Art. 1737, NCC).

Party to whom delivery should be made

Diligence required to be exercised by the carrier if the right of stoppage in transitu was exercised

It must be delivered, actually or constructively, to the consignee or to the person who has a right to receive them (Art.1736, NCC).

The diligence required is ordinary diligence because of the following: a. It is holding the goods in the capacity of an ordinary bailee or warehouseman and not as a carrier b. There is a change of contract from a contract of carriage to a contract of deposit (Art. 1737, NCC).

NOTE: Delivery of the cargo to the customs authorities is not delivery to the consignee, or to the person who has a right to receive them (Lu Do & Lu Ym Corp. v. Binamira, GR No. L-9840, April 22, 1957).

Constructive delivery

Obligation required of the common carrier in case of stoppage in transitu

There is constructive delivery when delivery is effected not by actually transferring the possession of thing to the vendee (in this case, the other party, either the carrier or the consignee) but by legal formalities or by symbolic tradition (Pineda, 2010).

When notice of stoppage in transitu is given by the seller to the carrier, he must redeliver the goods to, or according to the directions of, the seller. The expenses of such delivery must be borne by the seller (Art. 1532, NCC).

Party liable for the misdelivery by a carrier who was chosen by the buyer

NOTE: If the seller instructs to deliver it somewhere else, a new contract of carriage is formed and the carrier must be paid accordingly.

Misdelivery of the goods is attributable to the carrier and not to the seller. And, since the carrier was chosen and authorized to make the delivery by the buyer itself, the seller cannot be held responsible for UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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TRANSPORTATION LAWS STIPULATION FOR LIMITATION OF LIABILITY

Q: Suppose A was riding on an airplane of a common carrier when the accident happened and A suffered serious injuries. In an action by A against the common carrier, the latter claimed that 1) there was a stipulation in the ticket issued to A absolutely exempting the carrier from liability from the passenger‘s death or injuries ad notices were posted by the common carrier dispensing with the extraordinary diligence of the carrier, and 2) A was given a discount on his plane fare thereby reducing the liability of the common carrier with respect to A in particular. a) Are those valid defenses? (1%) b) What are the defenses available to any common carrier to limit or exempt it from liability? (4%) (2001 Bar Exam Question)

Valid stipulations that a common carrier of goods may indicate in a contract in order to escape liability 1. A stipulation limiting the liability of the common carrier for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence, provided it be: a. In writing, signed by the shipper or owner; b. Supported by a valuable consideration other than the service rendered by the common carrier, and c. Reasonable, just and not contrary to public policy. 2. An agreement limiting the common carrier's liability for delay on account of strikes or riots (Art. 1748, NCC). 3. 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 (Art. 1749, NCC). 4. A contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the goods (Art. 1750, NCC).

A: a) No. These are not valid defenses because they are contrary to law as they are in violation of the extraordinary diligence required of common carriers. (Article 1757, 1758 New Civil Code) b) The defenses available to any common carrier to limit or exempt it from liability are: 1. observance of extraordinary diligence, 2. or the proximate cause of the incident is a fortuitous event or force majeure, 3. act or omission of the shipper or owner of the goods, 4. the character of the goods or defects in the packing or in the containers, and 5. order or act of competent public authority, without the common carrier being guilty of even simple negligence (Article 1734, NCC).

NOTE: Notwithstanding these valid stipulations, a common carrier can be held liable for the loss, or destruction or deterioration of the goods 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 (Art. 1747, NCC).

Q: X took a plane from Manila bound for Davao via Cebu where there was a change of planes. X arrived in Davao safely but to his dismay, his two suitcases were left behind in Cebu. The airline company assured X that the suitcases would come in the next flight but they never did. X claimed P2,000 for the loss of both suitcases, but the airline was willing to pay only P500 because the airline ticket stipulated that unless a higher value was declared, any claim for loss cannot exceed P250 for each piece of luggage. X reasoned out that he did not sign the stipulation and in fact had not even read it. X did not declare a greater value despite the fact that the clerk had called his attention to the stipulation in the ticket. Decide the case. (1998 Bar Exam Question)

Annulment of a stipulation limiting the common carrier’s liability by the shipper or owner A stipulation limiting the common carrier’s liability may be annulled by the shipper or owner if the common carrier refused to carry the goods unless the shipper or owner agreed to such stipulation (Art. 1746, NCC). However, under this provision, annulment of the agreement limiting the carrier’s liability is still necessary (Martin, 1989). Effect of the stipulation to limit liability to the presumption of negligence of the carrier Even if there is an agreement limiting the liability of the common carrier in the vigilance over the goods, the common carrier is still disputably presumed to have been negligent in case of its loss, destruction or deterioration (Art. 1752, NCC).

A: Even if he did not sign the ticket, X is bound by the stipulation that any claim for loss cannot exceed P250 for each luggage. He did not declare a higher value. X is entitled to P500 for the two luggages lost.

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MERCANTILE LAW VOID STIPULATIONS

LIMITATION OF LIABILITY TO FIXED AMOUNT

Void stipulations in a contract of carriage of goods (CR2UELED)

Requirements in order that a stipulation which limits the liability of common carriers in the carriage of goods be valid

1. 2. 3.

4. 5.

6. 7. 8.

That the common carrier need not observe any diligence in the Custody of the goods That the goods are transported at the Risk of the owner or shipper 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 Any similar stipulation that is Unreasonable, unjust and contrary to public policy That the common carrier shall Exercise a degree of diligence less than that of a good father of a family, or a man of ordinary prudence in the vigilance over the movables transported That the common carrier will not be liable for any Loss, destruction, or deterioration of the goods That the common carrier shall not be responsible for the acts or omissions of his or its Employees 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 (Art. 1745, NCC).

A contract fixing the sum that may be recovered for the loss, destruction, and deterioration of goods is binding provided that it is: 1. Just and reasonable under the circumstances and 2. It has been fairly and freely agreed upon (Art. 1750, NCC). LIMITATION OF LIABILITY IN ABSENCE OF DECLARATION OF GREATER VALUE Extent of the liability of the common carrier in case there is a stipulation fixing specified amount GR: The liability of the common carrier shall not exceed the stipulation in a contract of carriage even if the loss or damage results from3 the carrier's negligence (Eastern and Australian Shipping Co. v Great American Insurance Co., GR No. L-37604, October 23, 1981). XPN: Where the shipper or owner of the goods declares a greater value and pays corresponding freight (NCC, Art. 1749).

Discuss whether or not the following stipulations in a contract of carriage of a common carrier are valid: 1. A stipulation limiting the sum that may be recovered by the shipper or owner to 90% of the value of the goods in case of loss due to theft. 2. A stipulation that in the event of loss, destruction or deterioration of goods on account of the defective condition of the vehicle used in the contract of carriage, the carrier‘s liability is limited to the value of the goods appearing in the bill of lading unless the shipper or owner declares a higher value. (2002 Bar Exam Question)

The liability of an airline company for lost baggage is limited to the amount stated in the ticket unless the passenger declared a higher valuation and paid additional fare (Pan American World Airways, Inc. v. Appellate Court, 164 SCRA 268). But when the goods being shipped are packed in cartons placed in containers supplied by the carrier and the number of cartons is disclosed in the shipping documents, it is the number of cartons and not of the containers that should be used in computing the liability of the carrier for the loss of the goods, as it is the cartons that constitute the packages (Eastern Shipping Lines, Inc. v. Intermediate Appellate Court, 150 SCRA 464).

A: 1. The stipulation is considered unreasonable, unjust and contrary to public policy under Article 1745 of the Civil Code. 2. The stipulation limiting the carrier‘s liability to the value of the goods appearing in the bill of lading unless the shipper or owner declares a higher value, is expressly recognized in Article 1749 of the Civil Code.

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Requirements in order that a common carrier’s extent of liability may be increased The common carrier’s liability may be extended beyond the specified amount mentioned if; 1. The shipper or owner of the goods declares a greater value and 2. Pays corresponding freight (Art. 1749, NCC).

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TRANSPORTATION LAWS LIABILITY FOR BAGGAGE OF PASSENGERS

victim told the driver that he has valuable item (1997 Bar Question)

CHECKED-IN BAGGAGE Ordinarily, the common carrier is not liable for acts of other passengers. But the common carrier cannot relieve itself from liability if the common carrier’s employees could have prevented the act or omission by exercising due diligence. In this case, the passenger asked the driver to keep an eye on the bag which was placed beside the driver’s seat. If the driver exercised due diligence, he could have prevented the loss of the bag.

Rule on checked-in baggage of passengers The provisions of Articles 1733 to 1753 of the NCC shall apply (NCC, Art. 1754). An airline company is liable for moral damages where it left behind the luggage of a passenger and its employees did not assist the passenger in locating his luggage but instead treated him boorishly (Pan American World Airways v. Intermediate Appellate Court, 186 SCRA 687).

Q: A shipped thirteen pieces of luggage through LG Airlines from Teheran to Manila as evidenced by LG Air Waybill which disclosed that the actual gross weight of the luggage was 180 kg. Z did not declare an inventory of the contents or the value of the 13 pieces of luggage. After the said pieces of luggage arrived in Manila, the consignee was able to claim from the cargo broker only 12 pieces, with a total weight of 174 kg. X advised the airline of the loss of one of the 13 pieces of luggage and of the contents thereof. Efforts of the airline to trace the missing luggage were fruitless. Since the airline failed to comply with the demand of X to produce the missing luggage, X filed an action for breach of contract with damages against LG Airlines. In its answer, LG Airlines alleged that the Warsaw Convention which limits the liability of the carrier, if any, with respect to cargo to a sum of $20 per kilo or $9.07 per pound, unless a higher value is declared in advance and additional charges are paid by the passenger and the conditions of the contract as set forth in the air waybill, expressly subject the contract of the carriage of cargo to the Warsaw Convention. May the allegation of LG Airlines be sustained? Explain. (1993 Bar Exam Question).

BAGGAGE IN POSSESSION OF PASSENGERS Rules applicable when the baggage is in the personal custody of the passengers The rules in articles 1998 and 2000 to 2003 concerning the responsibility of hotel-keepers for necessary deposit shall be applicable (ibid): 1. The common carrier shall be responsible for shipper’s baggage 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 shipper, they take the precautions which said common carriers or their substitutes advised relative to the care and vigilance of their effects (Art. 1998, NCC). 2. The responsibility shall include the loss of, or injury to the personal property of the shipper caused by the employees of the common carrier as well as strangers; but not that which may proceed from any force majeure (Art. 2000, NCC). 3. The act of a thief or robber, who has entered the carrier is not deemed force majeure, unless it is done with the use of arms or through an irresistible force (Art. 2001, NCC). 4. The common carrier is not liable for compensation if the loss is due to the acts of the shipper, his family, or servants, or if the loss arises from the character of the things brought into the carrier (Art. 2002, NCC). 5. The common carrier cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the passenger. Any stipulation between the common carrier and the shipper whereby the responsibility of the former as set forth in Articles 1998 to 2001 is suppressed or diminished shall be void (Art. 2003, NCC).

A: Yes. Unless the contents of a cargo are declared or the contents of a lost luggage are proved by the satisfactory evidence other than the self-serving declaration of one party, the contract should be enforced as it is the only reasonable basis to arrive at a just award. The passenger or shipper is bound by the terms of the passenger ticket or the waybill (Panama v Rapadas 209 s 67). Q: Marino was a passenger on a train. Another passenger, Juancho, had taken a gallon of gasoline placed in a plastic bag into the same coach where Marino was riding. The gasoline ignited and exploded causing injury to Marino who filed a civil suit for damages against the railway company claiming that Juancho should have been subjected to

A common carrier can be held liable for the loss of a valuable item stolen by other passenger when the

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MERCANTILE LAW inspection by its conductor. The railway company disclaimed liability resulting from the explosion contending that it was unaware of the contents of the plastic bag and invoking the right of Juancho to privacy. a) Should the railway company be held liable for damages? b) If it were an airline company involved, would your answer be the same? Explain briefly. (1992 Bar Exam Question)

lessened by stipulation, by posting of notices, by statements on tickets, or otherwise (Art. 1757, NCC). XPN: When a passenger is carried gratuitously, a stipulation limiting the common carrier’s liability for negligence is valid (Art. 1758, NCC). NOTE: The passenger must be carried gratuitously. If it is only a reduction of fare, then any limitation of the common carrier’s liability is not justified (ibid).

A: a) No. The railway company is not liable for damages. In overland transportation, the common carrier is not bound nor empowered to make an examination on the contents of packages or bags, particularly those handcarried by passengers.

XPN to the XPN: Notwithstanding the exception, common carriers will be liable nevertheless for willful acts or gross negligence (ibid). Assumption of risk on the part of passengers

b) If it were an airline company, the common carrier should be made liable. In case of air carriers, it is not lawful to carry flammable materials in passenger aircrafts, and airline companies may open and investigate suspicious packages and cargoes (RA 6235)

Passengers must take such risks incident to the mode of travel. The passenger must observe the diligence of a good father of a family to avoid injury to himself (Art. 1761, NCC). NOTE: Carriers are not insurers of any and all risks to passengers and goods. It merely undertakes to perform certain duties to the public as the law imposes, and holds itself liable for any breach thereof (Pilapil v. CA, G.R. No. 52159, Dec. 22, 1989).

SAFETY OF PASSENGERS Extent of the extraordinary diligence of common carrier to passengers 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 (Art 1755, NCC).

DURATION OF LIABILITY Commencement of the duty to extraordinary diligence over passengers

The duty exists from the moment the person offers to be transported places himself in the care and control of the common carrier who accepts him as such passenger. The duty continues 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 and to look after his baggage and prepare for his departure (La Mallorca vs. CA, GR No. L-20761, July 27, 1966; Aboitiz Shipping, supra).

Who are not considered passengers (WAMU) 1.

2. 3.

4.

One who has boarded a Wrong vehicle, has been properly informed of such fact, and on alighting, is injured by the carrier. Invited guests and Accommodation passengers. One who attempts to board a Moving vehicle, although he has a ticket, unless the attempt be with the knowledge and consent of the carrier. One who remains on a carrier for an Unreasonable length of time after he has been afforded every safe opportunity to alight.

WAITING FOR CARRIER OR BOARDING OF CARRIER Duty of the common carriers in boarding of passengers

NOTE: The carrier is thus NOT obliged to exercise extraordinary diligence but only ordinary diligence in these instances.

It is the duty of common carriers of passengers, including common carriers by railroad train, streetcar, or motorbus, to stop their conveyances a reasonable length of time in order to afford passengers an opportunity to board and enter, and they are liable for injuries suffered by boarding passengers resulting from the sudden starting up or jerking of their

VOID STIPULATIONS Stipulations limiting the liability of common carrier in case of injury or death GR: The responsibility of a common carrier for the safety of passengers cannot be dispensed with or UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

observe

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TRANSPORTATION LAWS conveyances while they are doing so (Dangwa vs. CA,G.R. No. 95582, October 7, 1991).

passengers resulting from the sudden starting up or jerking of their conveyances while they are doing so. The victim, by stepping and standing on the platform of the bus, is already considered a passenger and is entitled all the rights and protection pertaining to such a contractual relation (ibid).

When a Public Utility Vehicle is not in motion, it is not necessary for a person who wants to ride the same to signal his intention to board When the bus is not in motion there is no necessity for a person who wants to ride the same to signal his intention to board. A public utility bus, once it stops, is in effect making a continuous offer to bus riders. Hence, it becomes the duty of the driver and the conductor, every time the bus stops, to do no act that would have the effect of increasing the peril to a passenger while he was attempting to board the same. The premature acceleration of the bus in this case was a breach of such duty (ibid).

A person who is merely stepping on the platform of a bus is already considered a passenger A person, by stepping and standing on the platform of the bus, is already considered a passenger and is entitled all the rights and protection pertaining to such a contractual relation. Hence, it has been held that the duty which the carrier owes to its patrons extends to persons boarding cars as well as to those alighting therefrom (Dangwa vs. CA,G.R. No. 95582, October 7, 1991).

Q: A bus of GL Transit on its way to Davao stopped to enable a passenger to alight. At that moment, Santiago, who had been waiting for a ride, boarded the bus. However, the bus driver failed to notice Santiago who was still standing on the bus platform, and stepped on the accelerator. Because of the sudden motion, Santiago slipped and fell down suffering serious injuries. May Santiago hold GL Transit liable for breach of contract of carriage? Explain.

The passenger is not considered negligent if the bus started moving slowly when the passenger is boarding the same Further, even assuming that the bus had "just started" and "was still in slow motion" at the point where the victim had boarded and was on its platform, the victim cannot be considered negligent under the said circumstances (Dangwa vs. CA, G.R. No. 95582, October 7, 1991).

A: Santiago may hold GL Transit liable for breach of contract of carriage. It was the duty of the driver, when he stopped the bus, to do no act that would have the effect of increasing the peril to a passenger such as Santiago while he was attempting to board the same. When a bus is not in motion there is no necessity for a person who wants to ride the same to signal his intention to board. A public utility bus, once it stops, is in effect making a continuous offer to bus riders. It is the duty of common carriers of passengers to stop their conveyances for a reasonable length of time in order to afford passengers an opportunity to board and enter, and they are liable for injuries suffered by boarding passengers resulting from the sudden starting up or jerking of their conveyances while they are doing so. Santiago, by stepping and standing on the platform of the bus, is already considered a passenger and is entitled to all the rights and protection pertaining to a contract of carriage.

Q: P, a sales girl in a flower shop at the Ayala Station of the Metro Rail Transit (MRT) bought two tokens or tickets, one for her ride to work and another for her ride home. She got to her flower shop where she usually worked from 8 a.m. to 5 p.m. At about 3 p.m., while P was attending to her duties at the flower shop, two crews of the MRT got into a fight near the flower shop, causing injuries to P in the process. Can P sue the MRT for contractual breach as she was within the MRT premises where she would shortly take her ride home? (2011 Bar Question)( A: No, since P had no intention to board an MRT train coach when the incident occurred. ARRIVAL AT DESTINATION Liability for death or injury to passengers upon arrival at destination

Common carrier may be held liable to a passenger who died while trying to board their vehicle

Once created, the relationship will not ordinarily terminate until the passenger has, after reaching his destination, safely alighted from the carrier's conveyance or had a reasonable opportunity to leave the carrier's premises. All persons who remain on the

It is the duty of common carriers of passengers to afford passengers an opportunity to board and enter, and they are liable for injuries suffered by boarding

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MERCANTILE LAW premises 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 a reasonable time to see after his baggage and prepare for his departure (La Mallorca v CA,G.R. No. L-21486, May 14, 1966).

Liability of the common carrier as regards to the acts of employees may not be limited by stipulation

The victim’s presence in a vessel after 1 hour from his disembarkation is not enough in order to absolve the carrier from liability in his death

Rationale behind the carrier’s liability

The common carrier’s responsibility cannot be eliminated or limited by stipulation, by the posting of notices, by statements on the tickets or otherwise (Art. 1760, NCC).

The basis of the carrier's liability for assaults on passengers committed by its drivers rests on the principle that it is the carrier's implied duty to transport the passenger safely. As between the carrier and the passenger, the former must bear the risk of wrongful acts or negligence of the carrier's employees against passengers, since it, and not the passengers, has power to select and remove them (Maranan v. Perez, GR No. L-22272, June 26, 1967).

Carrier-passenger relationship continues until the passenger has been landed at the port of destination and has left the vessel-owner’s premises (Aboitiz Shipping Corporation vs. CA, GR No. 84458, November 6, 1989). Q: Robert De Alban and his family rode a bus owned by Joeben Bus Company. Upon reaching their desired destination, they alighted from the bus but Robert returned to get their baggage. However, his youngest daughter followed him without his knowledge. When he stepped into the bus again, the bus accelerated that resulting to Robert’s daughter death. The bus ran over her. Is the bus company liable?

Q: The AAA Bus Company picks up passengers along EDSA. X, the conductor, while on board the bus, drew his gun and randomly shot the passengers inside. As a result, Y, a passenger, was shot and died instantly. Is AAA Bus Company liable? (2012 Bar Question) A: Yes. The bus company is liable because common carriers are liable for the negligence or willful act of its employees even though they acted beyond the scope of their responsibility.

A: Yes. The relation of carrier and passenger does not cease at the moment the passenger alights from the carrier’s vehicle at a place selected by the carrier at the point of destination, but continues until the passenger has had a reasonable time or reasonable opportunity to leave the current premises (La Mallorca vs. CA,GR L-20761, 27 July 1966).

OTHER PASSENGERS AND STRANGERS Extent of liability of common carriers for acts of co-passengers or strangers

LIABILITY FOR ACTS OF OTHERS A common carrier is responsible for injuries suffered by a passenger on account of the willful acts or negligence of other passengers or of strangers, if the carrier’s employees through the exercise of the diligence of a good father of a family would have prevented or stopped the act or omission (Art. 1763, NCC).

EMPLOYEES Common carriers are liable for the acts of their employees Common carriers are liable for the death of or injuries to passengers through the negligence or willful acts of the former’s employees, although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers. The 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 (Art. 1759, NCC).

Q: P rode a Sentinel Liner bus going to Baguio from Manila. At a stop-over in Tarlac, the bus driver, the conductor, and the passengers disembarked for lunch. P decided, however, to remain in the bus, the door of which was not locked. At this point, V, a vendor, sneaked into the bus and offered P some refreshments. When P rudely declined, V attacked him, resulting in P suffering from bruises and contusions. Does he have cause to sue Sentinel Liner? (2011 Bar Question)

NOTE: The liability of the common carrier to the personal violence of its employees or agents upon its passengers extends only to those acts which the carrier could foresee or avoid through the exercise of the diligence required. UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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TRANSPORTATION LAWS A: Yes, since the carrier's crew did nothing to protect a passenger who remained in the bus during the stop-over.

several or solidary with the driver (Philtranco Service Enterprises, Inc. v. CA, G.R. No. 120553).June Q: Marites, a paying bus passenger, was hit above her left eye by a stone hurled at the bus by an unidentified bystander as the bus was speeding through the National Highway. The bus owner‘s personnel lost no time in bringing Marites to the provincial hospital where she was confined and treated. Marites wants to sue the bus company for damages and seeks your advice whether she can legally hold the bus company liable. What will you advise her? (1994 Bar Exam Questions)

Q: In a jeepney, Angela, a passenger, was injured because of the flammable material brought by Antonette, another passenger. Antonette denied her baggage to be inspected invoking her right to privacy. Should the jeepney operator be held liable for damages? A: No. The operator is not liable for damages. In overland transportation, the common carrier is not bound nor empowered to make an examination on the contents of packages or bags, particularly those handcarried by passengers (Nocum v. Laguna Tayabas Bus Company, G.R. No. L-23733, October 31, 1969).

A: I will advise her that the bus company cannot be held liable. There is no showing that any such incident previously happened so as to impose an obligation on the part of the personnel of the bus company to warn the passengers and to take the necessary precaution. Such hurling of a stone constitutes fortuitous event in this case. The bus company is not an insurer of the absolute safety of its passengers (Pilapil v. CA, G.R. No. 52159, Dec. 22, 1989).

Q: In the question above, if it were an airline company involved, would your answer be the same? (1992 Bar Question) A: No. The common carrier should be made liable. In case of air carriers, it is unlawful to carry flammable materials in passenger aircrafts, and airline companies may open and investigate suspicious packages and cargoes pursuant to RA 6235.

The registered owner of the vehicle may be held liable for damages suffered by a third person in the course of the operation of the vehicle. The registered owner of a public service vehicle is responsible for damages that may arise from consequences incident to its operation or that may be caused to any of the passengers therein (Gelisan v. Alday, G.R. No. L-30212, Sept 30, 1987).

Q: A passenger was injured because a bystander outside the bus hurled a stone. Is the bus company liable? (1994 Bar Question)

Also, the liability of the registered owner of a public service vehicle for damages arising from the tortious acts of the driver is primary, direct, and joint and several or solidary with the driver (Philtranco Service Enterprises, Inc. v. CA, G.R. No. 120553).

A: No. There is no showing that any such incident previously happened so as to impose an obligation on the part of the personnel of the bus company to warn the passengers and to take the necessary precaution. Such hurling of a stone constitutes fortuitous event in this case. The bus company is not an insurer of the absolute safety of its passengers (Pilapil v. CA, G.R. No. 52159, Dec. 22, 1989).

EXTENT OF LIABILITY FOR DAMAGES Kinds of damages that may be recovered in case of death of a passenger (DEMEx-AIH)

The registered owner of the vehicle may be held liable for damages suffered by a third person in the course of the operation of the vehicle

1. 2.

The registered owner of a public service vehicle is responsible for damages that may arise from consequences incident to its operation or that may be caused to any of the passengers therein (Gelisan v. Alday, G.R. No. L-30212, Sept 30, 1987).

3. 4. 5. 6. 7.

Also, the liability of the registered owner of a public service vehicle for damages arising from the tortious acts of the driver is primary, direct, and joint and

An indemnity for the Death of the victim An indemnity for loss of Earning capacity of the deceased Moral damages Exemplary damages Attorney's fees and expenses of litigation Interest in proper cases (Briñas v. People,G.R. No. L-30309, Nov. 25, 1983). Hospital and funeral expenses

NOTE: Carrier is not liable for exemplary damages where there is no proof that it acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Jurisprudential indemnity of a common carrier in case of death of a passenger

The diligence of the passenger may be considered in determining liability in case of injury

In case of death of a passenger, the common carrier is liable to pay 50,000 pesos as indemnity for the life of a passenger (Victory Liner v Gammad, G.R. No. 159636, November 25, 2004).

The passenger must observe the diligence of a good father of a family or ordinary diligence to avoid injury to himself (NCC, Art. 1761). This means that if the proximate cause of the passenger’s injury is his negligence, the common carrier is not liable.

Formula for computing the indemnity for lost earnings in case of death of a victim

Options available to recover damages in case of death or injuries to persons, which resulted from a collision

The formula for the computation of unearned income is: 1. Net Earning Capacity = Life Expectancy x (Gross annual income - Reasonable and necessary living expenses). 2. Life expectancy is determined in accordance with the formula: 2 /3 x (80 – age of deceased at the time of death) (Heirs of Ochoa v VS.G & S Transport Corporation, G.R. No. 170071, March 09, 2011 ). NOTE: When there is no showing that the living expenses constituted the smaller percentage of the gross income, the Court fixes the living expenses at half of the gross income.

1. Culpa contractual

BASIS OF CIVIL LIABILITY (Damages) Contract of carriage

2. Culpa aquiliana

Quasi-delic t

Liability with regard to moral damages GR: Moral damages are not recoverable for breach of contract of carriage in view of Art. 2219-20 of the Civil Code. XPN: 1. Where the mishap results in the death of the passenger 2. Where it is proved that the common carrier was guilty of fraud or bad faith, even if death does not result. Jurisprudential amount of moral damages to which the heirs of a deceased passenger are entitled to recover

3. Culpa criminal

The current jurisprudential award for the loss of life of a passenger is 100,0000 pesos by way of moral damages (Victory Liner v Gammad, Ibid, Heirs of Ochoa v VS.G & S Transport Corporation, Ibid).

Exercise of extraordinary due diligence Fortuitous event Contributory negligence of passengers – it does not bar recovery of damages for death or injury if the proximate cause is the negligence of the common carrier but the amount of damages shall be equitably reduced (Art. 1762). UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Filed against the common carrier wherein he is a passenger. (Art. 1733, 1755-1764, NCC.) May be filed by third persons or the passenger against the drivers (may also be the owners) of both vehicles and the owners thereof. If the owner is an employer of the driver, still the former has a primary liability for an action brought on the ground of quasi delict under Art. 2180, NCC. (Carpio vs. Doroja, GR No. 84516, December 5, 1989.) May be filed by the third persons or the passengers against the driver (may also be the owner) at fault if his act amounts to a crime. If the owner is an employer of the driver, then the former has a subsidiary liability (Art. 103, Revised Penal Code [RPC].) for an action brought on the ground of civil liability arising from crime under Art. 100 of the RPC. (Carpio vs. Doroja, supra.)

Defenses available in culpa contractual (FEC) 1. 2. 3.

Crime

DEFENDANT OF THE CASE

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TRANSPORTATION LAWS Two types of bill of lading

Action to enforce liability of the employer of the negligent driver under Art. 103 of the RPC v. Action based on quasi-delict ART. 103, RPC Employer is only subsidiarily liable. There must be a judgment of conviction against the negligent driver otherwise the action against the employer would be premature. The defense of due diligence in selection and supervision of employees cannot be invoked.

1. Negotiable – If issued to the bearer or to the order of any person named in such bill. 2. Non-negotiable – If issued to a specific person named in such bill.

ART. 2180, NCC (QUASI-DELICT) Liability is primary and direct. Action may proceed independently from the criminal action.

Q: X is a trader of school supplies in Calapan, Oriental Mindoro. To bring the school supplies to Calapan, it has to be transported by a vessel. Because there were so many passengers, the two (2) boxes of school supplies were loaded but the shipping company was not able to issue the Bill of Lading. So, on board, the Ship Captain issued instead a "shipping receipt" to X indicating the two (2) boxes of school supplies being part of the cargo of the vessel. Which phrase therefore, is the most accurate? (2012 Bar Question)

The defense of due diligence in selection and supervision of employees may be invoked.

a. the owner of the vessel is not liable because no bill of lading was issued to X hence, no contract of carriage was perfected. b. it is possible to have a contract of carriage of cargo even without a bill of lading, and the "shipping receipt" would be sufficient. c. the only acceptable document of title is a Bill of Lading. d. None of the above.

BILL OF LADING It is a written acknowledgment of receipt of goods and agreement to transport them to a specific place and to a named person or to his order (Unsworth Transport International [Phils] v. CA, G.R. No. 166520, 26 July 2010).

A: B. Although Article 359 of the Code of Commerce provides that “the shipper as well as the carrier of merchandise or goods may mutually demand that a bill of lading be made,” still, said bill of lading is not indispensable. For as long as there is a meeting of the minds of the parties, a contract of carriage exists even in the absence of a bill of lading (Perez, supra, pg. 112, citing Robles vs. Santos, 44 OG 2268; Compania Maritima vs. Insurance Co. of NA, 12 SCRA 213).

THREE-FOLD CHARACTER OF A BILL OF LADING Three-fold character of a bill of lading It is a receipt for the goods shipped and a contract to transport and deliver the same as therein stipulated. 1. As a receipt, it recites the date and place of shipment, describes the goods as to quantity, weight, dimensions, identification marks and condition, quality, and value. 2. As a contract, it names the contracting parties, which include the consignee, fixes the route, destination, and freight rate or charges, and stipulates the rights and obligations assumed by the parties (Phoenix Assurance Co., Ltd. v. United States Lines, G.R. No. L-24033, Feb. 22, 1968). 3. As a document of title it regulates the relations between a carrier and a holder of the same.

Technical jargons 1. On Board – States that the goods have been received on board the vessel which is to carry the goods and is issued when goods have been placed aboard a ship with every reasonable expectation that the shipment is as good as on its way. 2. Received for Shipment Bill – States that the goods have been received for shipment with or without specifying the vessel by which the goods are to be shipped and are issued whenever conditions are not normal and that there is insufficiency of shipping space. 3. Clean – Does not contain any notation indicating defect in the goods

NOTE: In the absence of a bill of lading, their respective claims may be determined by legal proofs which each of the contracting parties may present in conformity with law.

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MERCANTILE LAW condition precedent for a common carrier to be discharged of its contractual obligation. If surrender of the original bill of lading is not possible, acknowledgment of the delivery by signing the delivery receipt suffices (National Trucking and Forwarding Corporation v. Lorenzo Shipping Corporation, G.R. No. 153563, February 27, 2005).

4. Foul – Contains a notation indicating a defect in the goods 5. Spent – If the goods were already delivered but the bill of lading was not returned 6. Through - Issued by a carrier who is obliged to use the facilities of other carriers as well as his own facilities for the purpose of transporting the goods from the city of the seller to the city of the buyer, which bill of lading is honored by the second and other interested carriers who do not issue their own lading. 7. Custody – The goods are already received by the carrier but the vessel indicated has not yet arrived in the port 8. Port - The vessel indicated in the bill of lading that will transport the goods is already in the port

Period of delivery of goods 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 (Code of Commerce, Art. 370). Duty of the carrier if there is no period of time fixed for the delivery of goods

Q: A bill of lading indicated that the contract of carriage was under a "said to weigh" clause. What are the responsibilities of the shipper and the carrier?

The carrier shall be under the obligation to forward them with the first shipment of the same or similar merchandise he may make to the point where he must deliver them, and should he not do so, the damages occasioned by the delay shall be suffered by him (Code of Commerce, Art. 358).

A: This means that the shipper was solely responsible for the loading of the container, while the carrier was oblivious to the contents of the shipment . The arrastre operator was, like any ordinary depositary, duty-bound to take good care of the goods received from the vessel and to turn the same over to the party entitled to their possession, subject to such qualifications as may have validly been imposed in the contract between the parties. The arrastre operator was not required to verify the contents of the container received and to compare them with those declared by the shipper because, as earlier stated, the cargo was at the shipper’s load and count (Asian Terminals Inc. v. Simon Enterprises, Inc., G.R. No. 177116, February 27, 2013).

Determination of indemnity if the same is not stipulated If no indemnity has been stipulated and the delay exceeds the time fixed in the bill of lading, the carrier shall be liable for the damages which the delay may have caused (Art. 370, Code of Commerce). Grounds for the refusal of a consignee to take delivery of the goods (PLD2) 1.

DELIVERY OF GOODS The surrender of the bill of lading is necessary upon delivery of the goods

2.

If the carrier fails to require such surrender: 1. If non-negotiable – Action against the carrier does not lie. 2. If negotiable – Action by the shipper may lie against the carrier

3.

However, where the seller instructed the shipping company to deliver the cargoes to the buyer without requiring the presentation of the bill of lading, the shipping company is not liable for releasing the cargoes to the buyer (Macam v. CA, 313 SCRA 77).

4.

NOTE: In all cases, the shipper may exercise the right of abandonment by notifying the carrier. Ownership over damaged goods passes to the carrier and carrier must pay shipper the market value of the goods at point of destination.

NOTE: The surrender of the original bill of lading is not a UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

When a Part of the goods transported are delivered and the consignee is able to prove that he cannot make use of the part without the others; (Code of Commerce, Art. 365) If the cargo consists of Liquids and they have leaked out, nothing remaining in the containers but one-fourth (¼) of their contents, on account of inherent defect of cargo; (Code of Commerce, Art. 687) If the goods are Damaged and such damage renders the goods useless for the particular purpose for which there are to be used; (Code of Commerce, Art. 365) When there is Delay on account of the fault of the carrier; (Code of Commerce, Art. 371)

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TRANSPORTATION LAWS PERIOD FOR FILING CLAIMS

Commencement of action if delivery was made to arrastre operator

Period for filing claims 1. 2.

Commencement of action should be computed from the time of delivery to the arrastre operator. To use as basis for computing the one year period, the delivery to the consignee would be unrealistic and might generate confusion between the loss or damage sustained by the goods while in the carrier’s custody and those occurring while in the arrastre operator’s possession (Martin, 1989, Ed.).

Immediately after delivery – if the damage is apparent; or Within 24 hours from delivery – If the damage is not apparent (Art. 366, Code of Commerce)

Applicability of Article 366 of the Code of Commerce It applies in case of domestic transportation (inter-island) where there is damage to the goods transported.

A claim against the arrastre operator must be filed within fifteen days from the delivery of goods (International Container Terminal Services, Inc. v. Prudential Guarantee and Assurance Company, Inc. 320 SCRA 244).

Requisites before claim for damages under Art. 366 may be demanded 1.

2.

Consignment of goods through a common carrier, by a consignor in one place to a consignee in another place; and The delivery of the merchandise by the carrier to the consignee at the place of destination (New Zealand Ins. Co., Ltd. v. Choa Joy, G.R. No. L-7311, Sept. 30, 1955).

The filing of a provisional claim is substantial compliance with the provision in the management contract of the arrastre operator that a formal claim for the loss of goods must be filed within thirty days from the filing of the entry (Metro Port Service Inc. v. Intermediate Appellate Court, 213 SCRA 103). NOTE: The 1 year period of prescription is not applicable to misdelivery or conversion of goods.

Effect of paying the transportation charges in the filing of an action on account of damages to goods

PERIOD FOR FILING ACTIONS 1. 2.

If paid before checking the goods – The right to file a claim is not waived. If paid after the goods were checked – The right to file a claim is alreadywaived (Southern Lines, Inc. v. CA, G.R. No. L-16629, Jan. 31, 1962).

Period for filing actions For coastwise or carriage within the Philippines, Within 6 years if no bill of lading has been issued or within 10 years if a bill of has been issued. For international carriage from foreign port to the Philippines within 1 year from delivery of goods or the date when the goods have been delivered.

NOTE: The filing of claim is a condition precedent for recovery of damages.

Doctrine of combined or connecting services NOTE: The compliance with a requirement in the bill of lading that the consignee must file a claim for loss or damage to the goods shipped within thirty days from delivery is a condition precedent to the accrual of a right of action against the carrier (Philippine American General Insurance Co. v. Sweet Lines, Inc., 212 SCRA 194).

The carrier which delivered the goods to the consignee shall assume the obligations, rights and actions of those who preceded him in the conveyance of the goods. The shipper or consignee should proceed against the one who executed the contract or against the others who received the goods without reservation. But even if there is reservation, they are not exempted from liabilities that they may have incurred by reason of their own acts (Code of Commerce, Art. 373).

Q: Akiro of Tokyo, Japan sent various goods to his friend Juan in Cebu City, Philippines, through one of the vessels of Worth Well Shippers, Inc., an American corporation. En route to Cebu City, the vessel had two stops, first in Hong Kong, and second, in Manila. While travelling from Tokyo to Hong Kong, the goods were damaged. What law will govern? (2013 Bar Question) a. Japanese law b. Hong Kong law

The carrier may then file a third-party complaint against the one who is really responsible. The carrier is an indispensable party. But the shipper or consignee may sue all of them as alternative defendants.

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MERCANTILE LAW c. Chinese law d. Philippine law e. American law

turn, the charterer supplies, equips, and mans the vessel. The charterer is the owner pro hac vice. As owner pro hac vice of the vessel, the charterer assumes the rights and liabilities of the owner to third parties who deal with the vessel, it is the charterer and its agent who are liable for the wages of seamen hired by the master of the vessel, as the master of the vessel is acting in behalf of the charterer (Litonjua Shipping Co., Inc. v. National Seamen Board, 176 SCRA 189).

A: D. Philippine Law Q: Assuming Philippine law to be applicable and Juan fails to file a claim with the carrier, may he still commence an action to recover damages with the court? (2013 Bar Question) a. No, the failure to file a claim with the carrier is a condition precedent for recovery. b. Yes, provided he files the complaint within 10 years from delivery. c. Yes, provided he files the complaint within 10 years from discovery of the damage. d. Yes, provided he files the complaint within 1 year from delivery. e. Yes, provided he files the complaint within 1 year from discovery of the damage.

Owner pro hac vice The charterer is considered the owner of the vessel for the voyage or service stipulated. The charterer and not the owner of the vessel is liable for vessel’s expenses, including seaman’s wages. 2. Contract of affreightment – the owner of the vessel leases a part or all of its space to haul goods for others. It can either be: a. Time charter– Vessel is chartered for a particular time or duration. While the ship owner still retains possession and control of the vessel, the charterer has the right to use all vessel’s facilities. The charterer may likewise designate vessel’s destination.

A: B. Yes, provided he files the complaint within 10 years from delivery. MARITIME COMMERCE Agents of maritime commerce 1. Ship-owners and ship agents 2. Captains and masters of the vessel 3. Officers and Crews of the vessel 4. Supercargoes (Sundiang, 2011)

Since in a time charter the shipowner retains possession and control of the ship, the ship remains a common carrier. (Planters Products, Inc. v. CA, 226 SCRA 476)

Supercargoes b. Voyage charter– Vessel is chartered for a carriage of goods from one or more ports of loading to one or more ports of unloading.

Persons especially employed by the owner of a cargo to take charge of and sell to the best advantage merchandise which has been shipped, and to purchase returning cargoes and to receive freight, as he may be authorized.

Voyage charter A voyage charter is a contract wherein the ship was leased for a single voyage for the conveyance of goods, in consideration of the payment of freight. 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 freight.

CHARTER PARTIES Charter party contract A contract whereby the whole or part of the ship is let by the owner to a merchant or other person for a specified time or use for the conveyance of goods, in consideration of the payment of freight (Caltex v. Sulpicio Lines, G.R. No. 131166, Sept. 30, 1999).

An owner who retains possession of the ship remains liable as carrier and must answer for loss or non-delivery of the goods received for transportation (Cebu Salvage Corp. vs. Philippine Home Assurance Corp., G.R. No. 150403, Jan. 25, 2007).

Classes of charter party 1. Bareboat or demise – the ship owner gives possession of the entire vessel to the charterer. In UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

NOTE: The same concept applies to a time charter.

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TRANSPORTATION LAWS Bareboat or demise charter party v. Contracts of affreightment BAREBOAT/DEMISE CHARTER CONTRACT Negligence of the charterer gives rise to its liability to others. Charterer is regarded as owner pro hac vice. Ship owner temporarily relinquishes possession and ownership of the vessel.

e. Arrival at port for Repairs - if repairs take less than 30 days, pay full freightage; if more than, freightage in proportion to the distance covered.

CONTRACT OF AFFREIGHTMENT Ship owner remains liable and carrier must answer for any breach of duty. Charterer is not regarded as owner. Ship owner retains ownership over the vessel. (Coastwise Lighterage v. CA, G.R. No. 114167, July 12, 1995)

2. At the request of the ship owner: (Sa-Te) a. If extra lay days TErminate without the cargo being placed alongside vessel; and b. SAle by the owner of the vessel before loading by the charterer. 3. Due to fortuitous event: (WEB-Pro-N) a. War – There is a governmental prohibition of commercial intercourse, intended to bring about an entire cessation for the time being of all trade whatever. b. Embargo – A proclamation or order of State, usually issued in times of war or threatened hostilities, prohibiting the departure of ships or goods from some or all the ports of such State until further order; or c. Blockade – A sort of circumvallation around a place by which all foreign connection and correspondence is, as far as human power can effect it, to be cut off. d. PROhibition to receive cargo at port of destination. e. Inability of the vessel to Navigate (Art. 640).

A written contract of affreightment may be amended by oral agreement and since in such a case the terms of the contract shall be those embodied in the bill of lading, no demurrage charges can be collected where this was not stipulated in the bill of lading (Market Developers, Inc. v. Intermediate Appellate Court, 177 SCRA 393). Q: For the transportation of its cargo from the Port of Manila to the Port of Kobe, Japan, Osawa & Co., c hartered bareboat M/V Ilog of Karagatan Corporation. M/V Ilog met a sea accident resulting in the loss of the cargo and the death of some of the seamen manning the vessel. Who should bear the loss of the cargo and the death of the seamen? Why?

LIABILITY OF SHIPOWNERS AND SHIPPING AGENTS Three-fold character of the captain (GVG) 1. 2. 3.

A: Osawa & Co. should bear the loss because it chartered bareboat M/V Ilog which in effect gave it exclusive control over the vessel. In a demise, in contrast to other charters, the charterer is considered the owner pro hac vice. The charterer is accordingly liable in personam for all liabilities arising out of the operation of the vessel; he is responsible for the actions of the master and crew (Litonjua Shipping Company, Inc. v. National Seamen Board and Gregorio P. Candongo, G.R. No. 51910).

General agent of the ship owner Vessel’s technical director Government representative of the flag he navigates under

Inherent powers of the ship captain (A2-C3-O) 1. To Appoint or make contracts with the crew in the ship agent’s absence, and 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 Correctional punishment: a. Upon those who fail to comply with orders; or b. Those wanting in discipline 4. To make Contracts for the charter of the vessel in the absence of the ship agent or of its consignee 5. To Adopt all proper measures to keep the vessel well supplied and equipped, purchasing all that may

Instances when a charter party may be rescinded 1. At the request of the charterer by: (FARER) a. Failure to place vessel at charterer’s disposal b. Abandoning the charter and paying half the price c. Return the vessel due to pirates, enemies, and bad weather d. Error in tonnage or flag

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MERCANTILE LAW be necessary for the purpose, provided there is no time to request instruction from the ship agent 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 (Art. 610).

6. For those arising by reason of his going out of his course or taking a course which he should not have taken without Sufficient cause, in the opinion of the officers of the vessel, at a meeting with the shippers or supercargoes who may be on board. No exceptions whatsoever shall exempt him from this obligation; 7. For those arising by reason of his Voluntarily entering a port other than that of his destination, outside of the cases or without the formalities referred to in Article 612; and 8. For those arising by reason of non-observance of the Provisions contained in the regulations on situation of lights and manoeuvres for the purpose of preventing collisions (Code of Commerce, Art. 618).

Obligations of the captain 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

15. 16.

Inventory of equipment Keep a copy of Code of Commerce on board Have a log Book, freight book, accounting book Conduct a marine survey of vessel before loading Remain on board while loading Demand pilot on departure and on arrival at each port Be on deck when sighting land Arrivals under stress: to file marine protest in 24 hours Record bottomry loan with Bureau of Customs Keep papers and properties of crew members who might die Conduct himself according to the instuctions of the ship agent Report to ship agent on arrival Observe rules on the situation of lights and maneuvers to prevent collisions Remain on board until the last hope to save the vessel is lost and to abide by the decision of the majority whether to abandon or not In case of shipwreck: file marine protest, within 24 hours Comply with rules and regulation on navigation (Code of Commerce, Art. 612).

NOTE: Ship owner/agent is not liable for the obligations contracted by the captain if the latter exceeds his powers and privileges inherent in his position of those which may have been conferred upon him by the former. However, if the amount claimed were used for the benefit of the vessel, the ship owner or ship agent is liable.

EXCEPTIONS TO THE RULE Exemption from liability of the captain for loss or injury to persons or cargo The captain shall not be liable for the loss or injury to persons or cargo if the loss or the injury is based on the following causes: 1. Force majeure 2. Obligations contracted for the vessel’s benefit, except when the captain expressly agrees to be liable. A captain may not have himself substituted by another

LIABILITY FOR ACTS OF THE CAPTAIN Cases where the ship owner/agent shall be liable to the damages caused by the captain 1. 2. 3.

4.

5.

A captain may not have himself substituted n the absence of consent from the ship agent, and should he do so he shall be liable for all the acts of the substitute. (Art. 615, Code of Commerce)

Damages suffered by the vessel and its cargo by reason of want of skill or negligence on his part Thefts committed by the crew, reserving his right of action against the guilty parties; Losses, fines, and confiscations imposed an account of violation of customs, police, health, and navigation laws and regulations; Losses and damages caused by mutinies on board the vessel or by reason of faults committed by the crew in the service and defense of the same, if he does not prove that he made timely use of all his authority to prevent or avoid them; Those caused by the Misuse of the powers;

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Q: T, the captain of MV Don Alan, while asleep in his cabin, dreamt of an Intensity 8.0 earthquake along the path of his ship. On waking up, he immediately ordered the ship to return to port. True enough, the earthquake and tsunami struck three days later and his ship was saved. Was the deviation proper? (2011 Bar Bar Question) A: No, because no reasonable ground for avoiding a peril existed at the time of the deviation.

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TRANSPORTATION LAWS Instances when may the captain and crew members rescind their contractual employment

ii. During voyage: Captain and/or crew member shall receive salary until return to the port where contract was made. Article 637 of the Code of Commerce enumerates the just causes for discharge.

In case of: (WOND) 1. War 2. Outbreak of disease 3. New owner of vessel 4. Change of Destination (Art. 647).

b. Where captain and members of the crew’s contracts with ship agent be for a definite period or voyage: i. Captain and/or crew members may not be discharged until after the fulfillment of their contracts, except by reason of insubordination in serious matters, robbery, theft, habitual drunkenness, or damage caused to the vessel or to its cargo through malice or manifest or proven negligence (Code of Commerce, Art. 605) Ii. If the captain should be the vessel’s co-owner, he may not be discharged unless ship agent returns his amount of interest therein. In the absence of agreement between the parties, interest shall be appraised by experts appointed in the manner established by civil procedure.

Shipowner of a vessel The person in possession, management, control over the vessel, and the right to direct her navigation. While in their possession, the ship owners also receive freight earned and paid. Ship agent The person entrusted with provisioning or representing the vessel in the port in which it may be found. Hence, whether acting as agent of the owner of the vessel or as agent of the charterer, he will be considered as the ship agent and may be held liable as such, as long as he is the one that provisions or represents the vessel (Macondray & Co., Inc. v. Provident Insurance Corp, G.R. No. 154305, Dec. 9, 2004).

Doctrine of inscrutable fault (1997 Bar Question) Under this doctrine, where fault is established but it cannot be determined which of the two vessels were at fault, both shall be deemed to have been at fault.

Civil liabilities of ship owners and agents 1. Damages suffered by a 3rd person for tort committed by the captain; 2. Contracts entered for provisioning and repair of vessel; 3. Indemnities in favor of 3rd persons arising from the conduct of the captain from the care of goods; and 4. Damages in case of collision due to fault or negligence or want of skill of the captain. 5. Damages for the acts of the captain.

Doctrine of limited liability (1997 Bar Question) Also called the “no vessel, no liability doctrine,” it provides that liability of ship owner is limited to ship owner’s interest over the vessel. Consequently, in case of loss, the ship owner’s liability is also extinguished. Limited liability likewise extends to ship’s appurtenances, equipment, freightage, and insurance proceeds. The ship owner’s or agent’s liability is merely co-extensive with his interest in the vessel, such that a total loss of the vessel results in the liability’s extinction. The vessel’s total destruction extinguishes maritime liens because there is no longer any res to which they can attach (Monarch Insurance v. CA, G.R. No. 92735, June 8, 200).

Powers, functions, and liabilities of ship agents (ID) 1. Indemnity for expenses incurred for ship’s benefit. 2. Discharge of captain and/or crew members. The following are the rules observed by the ship agent: a. Captain and/or crew member’s contract not for a definite period or voyage: i. Before vessel sets out to sea: Ship agent at his discretion may discharge the captain and members of the crew. Ship agent must pay captain and/or crew members salaries earned according to their contracts, and without any indemnity whatsoever, unless there is an expressed agreement;

Rationale of the doctrine To offset against innumerable hazards and perils in sea voyage and to encourage ship building and maritime commerce. By abandonment, the ship owner and ship agent exempt themselves from liability, thus avoiding the possibility of risking his whole fortune in the business (Real and hypothecary nature of Maritime Law)

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MERCANTILE LAW Person who can invoke the limited liability rule

A: No, since X Shipping neither incurred a total loss nor abandoned its ship.

The only persons who could avail of this are the shipowner and the shipping agent. He is the very person whom the Limited Liability Rule has been conceived to protect. The petitioners cannot invoke this as a defense (Philippine Trigon Shipyard Corporation, et al. v. Crisostomo G. Concepcion, et al., G.R. No. 160088, July 13, 2011).

ACCIDENTS AND DAMAGES IN MARITIME COMMERCE Accidents in maritime commerce (CASA) 1. Collision 2. Averages 3. Shipwreck 4. Arrival under stress

Cases in which the doctrine of limited liability is allowed (SOLE) 1. Civil liability of the Ship agent or shipowner for the indemnities in favor of third persons; (Art. 587, Code of Commerce) 2. Civil liability of the co-Owners of the vessel for the results of the acts of the captain; (Art. 590, Code of Commerce) 3. If the vessel and her cargo be totally Lost, by reason of capture or shipwreck, all the rights shall be extinguished, both as regards the right of the crew to demand wages and the right of the ship agent to recover the advances made; (Code of Commerce, Art. 643) or 4. Extinction of civil liability incurred by the shipowner or agent in cases of maritime collisions (Code of Commerce, Art. 837).

GENERAL AVERAGE Averages All extraordinary or accidental expenses which may be incurred during the voyage for the preservation of the vessel or cargo or both. Kinds of averages 1. General average – Damages or expenses deliberately caused in order to save the vessel, its cargo or both from real and known risk. 2. Particular average – Damages or expenses caused to the vessel or cargo that did not inure to the common benefit, and borne by respective owners.

Exceptions to the doctrine of limited liability

General average v. Particular average

1. Repairs and provisioning of the vessel before the loss of the vessel; (Art. 586) 2. Insurance proceeds. If the vessel is insured, the proceeds will go to the persons entitled to claim from the shipowner; (Vasquez v. CA, G.R. No. L-42926, Sept. 13, 1985) 3. When the shipowner is guilty of fault or negligence; NOTE: But if the captain is the one who is guilty, doctrine may still be invoked, hence, abandonment is still an option.

4. Private carrier; or 5. Voyage is not maritime in character. Q: A cargo ship of X Shipping, Co. ran aground off the coast of Cebu during a storm and lost all its cargo amounting to Php50 Million. The ship itself suffered damages estimated at Php80 Million. The cargo owners filed a suit against X Shipping but it invoked the doctrine of limited liability since its vessel suffered an Php80 Million damage, more than the collective value of all lost cargo. Is X Shipping correct? (2011 Bar Question)

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

GENERAL AVERAGE

PARTICULAR AVERAGE

Both the ship and cargo are subject to the same danger There is a deliberate sacrifice of part of the vessel, cargo, or both Damage or expenses incurred to the vessel, its cargo, or both, redounded to the benefit of the respective owners. All those who have benefited shall satisfy the average.

No common danger to both the vessel and the cargo Expenses and damages are not deliberately made Did not inure to common benefit and profit of all persons interested in the vessel and her cargo.

Only the owner of the goods benefiting from the damage shall bear the expense of average.

Requisites of general average (CD-PS) 1. 2. 3.

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Common danger present; Deliberate sacrifice of part of the vessel or cargo; Successful saving of vessel and/or cargo; and

TRANSPORTATION LAWS 4.

Proper procedure and legal steps.

2.

Persons liable for the amount of the general averages All persons having an interest in the vessel and cargo therein at the time of the occurrence of the average shall contribute (Code of Commerce, Art. 812).

In case of interisland trade, the York-Antwerp Rules allow deck cargo. If the cargo loaded on deck is jettisoned as a result of which the vessel was saved, the cargo owner is entitled to reimbursement. If the cargo is saved, the cargo owner must contribute to the general average.

Reason: In interisland trade, voyages are usually short and there are intervening islands and the seas are generally not rough. In overseas trade, the vessel is exposed for many days to the peril of the sea making deck cargo is dangerous to navigation.

Person who shall be liable for the amount of the particular averages The owner of the things which gave rise to the expenses or suffered the damage shall bear the simple or particular averages (Code of Commerce, Art. 810).

COLLISIONS Collision It is the impact of two moving vessels.

Goods not covered by general average even if not sacrificed

Allision

1. Goods not recorded in the books or records of the vessel (Art. 855[2], Code of Commerce) 2. Fuel for the vessel if there is more than sufficient fuel for the voyage (Rule IX, York-Antwerp Rule)

It is the impact between a moving vessel and a stationary one. Error in extremis

Jettison

The sudden movement made by a faultless vessel during the third zone of collision with another vessel which is at fault under the second zone. Even if sudden movement is wrong, no responsibility will fall on the faultless vessel.

Act of throwing overboard part of a vessel’s cargo or hull in hopes of saving a ship from sinking. Goods jettisoned for the common safety, shall not pay freight; but its latter amount (freight lost) shall be considered as general average, computing the same in proportion to the distance covered when they were jettisoned (CC, Art. 660).

Rules governing liabilities of parties in case of collision 1. One vessel at fault – The ship owner of such vessel shall be liable for all resulting damages. 2. Both vessels at fault – Each vessel shall suffer their respective losses but as regards the owners of the cargoes, both vessels shall be jointly and severally liable. 3. Vessel at fault not known – Each vessel shall suffer its own losses and both shall be solidarily liable for loses or damages on the cargo. (Doctrine of Inscrutable Fault). 4. Fortuitous event – Each shall bear its own damage. 5. Third vessel at fault – The third vessel shall be liable for losses and damages sustained.

Order of goods to be cast overboard in case of jettison 1. Those on deck, preferring the bigger bulk with least value. 2. Those below upper deck, beginning with the heaviest with least utility. Q: Distinguish between overseas and inter-island trade regarding reimbursement and payment of general averages on jettisoned deck cargo. A: 1. In case of overseas trade, the York-Antwerp Rules prohibit the loading of cargo on deck. In case such cargo is jettisoned, the owner will not be entitled to reimbursement in view of the violation. If the cargo were saved, the owner must contribute to general average.

Zones of time in the collision of vessel 1. First zone – all time up to the moment when risk of collision begins. NOTE: One vessel is a privileged vessel and the other is a vessel required to take action to avoid collision.

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MERCANTILE LAW 2. Second zone – time between moment when risk of collision begins and moment it becomes practically a certainty.

vessel or who were in a condition who can make known their wishes (Arts. 835-836) or the captain himself (Verzosa and Ruiz v. Lim, G.R. No. 20145, Nov. 15, 1923). 2. The captain in cases of: a. Arrival under stress b. Shipwreck; or c. If the vessel has gone through a hurricane or where the captain believes that the cargo has suffered damages or averages.

NOTE: In this zone, the conduct of the vessels are primordial. It is in this zone that vessels must observe nautical rules, unless a departure therefrom becomes necessary to avoid imminent danger. The vessel which does not make such strict observance is liable.

3. Third Zone – time when collision is certain and up to the time of impact.

Q: Two vessels figured in a collision resulting in considerable loss of cargo. The damaged vessels were safely conducted to a port. Kim, a passenger and Ruby, a shipper who suffered damage to his cargo, did not file maritime protest. Can Kim and Ruby successfully maintain an action to recover losses and damages arising from the collision? (2007 Bar Question)

NOTE: An error at this point no longer bears any consequence.

Even if a collision which resulted in the damage to the cargoes of a vessel was due to the fault of the other vessel, the shipowner is still liable where the vessel did not exercise due diligence to avoid collision (Maritime Company of the Philippines v. CA, 171 SCRA 61).

A: Ruby, the shipper can successfully maintain an action to recover losses and damages arising from the collision notwithstanding his failure to file a maritime protest since the filing thereof is required only on the part of Kim, who, being a passenger of the vessel at the time of the collision, was expected to know the circumstances of the collision. Kim's failure to file a maritime protest will therefore prevent him from successfully maintaining an action to recover his losses and damages (Code of Commerce, Art 836).

A vessel is guilty of negligence even if it correctly navigated to the right to avoid the collision where it did not make such maneuver at an early stage and allowed the two vessels to come to close quarters (Mecenas v. CA, 180 SCRA 83). Role of a “protest” with respect to collisions The action for recovery of damages arising from collisions cannot be admitted if a protest or declaration is not presented within twenty-four hours before the competent authority of the point where the collision took place, or that of the first port of arrival of the vessel, if in Philippine territory, and to the Filipino consul if it occurred in a foreign country (Art. 835).

Shipwreck The loss of the vessel at sea as a consequence of its grounding, or running against an object in sea or on the coast. If the wreck was due to malice, negligence, or lack of skill of the captain, the owner of the vessel may demand indemnity from said captain.

NOTE: Failure to make a protest is not an impediment to the maintenance of a civil action based on quasi-delict.

Person who shall bear the losses in shipwreck

Instances when a protest is required 1. 2. 3.

4.

GR: The loss of a ship and her cargo shall fall upon their respective owners (Code of Commerce, Art. 840)

Arrival under stress; (Code of Commerce, Art. 612 [8]) Shipwreck; (Code of Commerce, Arts. 601 [15], 843) If the vessel has gone through a hurricane or where the captain believes that the cargo has suffered damages or averages; (Code of Commerce, Art. 642) and Maritime collision (Code of Commerce, Art. 835).

XPN: If the wreck was due to 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 from the captain for the damage caused to the vessel or to the cargo by the accident (Code of Commerce, Art. 841) Arrival under stress

Persons who can file a maritime protest

It is the arrival of a vessel at the nearest and most convenient port, if during the voyage the vessel

1. In case of maritime collision, the passenger or other persons interested who may be on board the UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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TRANSPORTATION LAWS cannot continue the trip to the port of destination on account of the lack of provisions, well-founded fear of seizure, privateers or pirates, or by reason of any accident of the sea disabling it to navigate (Art. 819, Code of Commerce).

Notice is not required to be filed in case of damage to goods under the COGSA There is no consequence on the right to bring suit if no notice is filed unlike under the Code of Commerce. It only gives rise to a presumption that the goods are delivered in the same condition as they are shipped.

NOTE: In arrival under stress, the captain must file a Protest which is merely a disclaimer for the shipowner not to be liable.

Failure to file notice of loss does not bar an action against the carrier if the action was filed within one year (Belgian Overseas Chartering & Shipping N.V. v. Philippine First Insurance Company, Inc, 383 SCRA 23).

Instances when arrival under stress is unlawful (LR-DM) 1. 2. 3. 4.

Lack of provisions is due to negligence to carry according to usage and customs Risk of enemy not well known of manifest Defect of vessel is due to improper repair; or Malice, negligence, lack of foresight or skill of captain (Art. 820).

There is also no consequence if the transportation charges and expenses are paid unlike under the Code of Commerce. Time when suits for loss or damage of cargo should be brought

CARRIAGE OF GOODS BY SEA ACT (COGSA)

The suit should be brought within one year from: 1. Delivery of the goods, in case of damage; or 2. The date when the goods should have been delivered, in case of loss.

Application of COGSA It will only be applied in terms of loss or damage of goods transported to and from Philippine ports in foreign trade. It may also apply to domestic trade when there is a paramount clause in the contract.

NOTE: The parties may agree to extend the one-year period to file a case under the Carriage of Goods by Sea (Universal Shipping Lines, Inc. v. Intermediate Appellate Court, 188 SCRA 170).

Paramount Clause – it is a stipulation or clause either on the bill of lading or charter party stipulating the laws that the parties agreed to be used of that particular transport. In the event that there will be a breach, the parties shall follow the law stipulated in the paramount clause (Martin, 1989, Ed.).

Q: To whom should such delivery be made as basis of the computation of the one-year period? A: The one-year period is computed from the delivery of goods to the operator and not to the consignee. Instances when the one-year period apply (AFLS)

The Carriage of Goods by Sea Act applies up to the final port of destination even if the transhipment was made on an inter-island vessel (Sea Land Service Inc. V. Intermediate Appellate Court, 153 SCRA 552).

1. Amendment of pleadings for suing the wrong party 2. Filing of third party complaint 3. Loss or damage to cargo, excluding delay or misdelivery 4. Subrogation (NCC, Art 2207).

Cases covered under the COGSA It applies only in case of non-delivery or damage, and not to misdelivery or conversion of goods (Ang v. American Steamship Agencies, Inc., G.R. No. L-22491, Jan. 27, 1967).

Time when the one year period in the COGSA is interrupted 1. When an action is filed in court; or 2. When there is an agreement between the parties to extend it.

Also, the deterioration of goods due to delay in their transportation is not covered by Sec. 6 of COGSA (Mitsui O.S.K. Lines Ltd. v. CA, G.R. No. 119571, Mar. 11, 1998).

Art. 1155 of the Civil Code (providing that the prescription of actions is interrupted by the making of an extrajudicial written demand by the creditor) is not applicable to actions brought under the COGSA

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MERCANTILE LAW NOTE: The prescriptive period for an action against a broker is ten years and not one year under the COGSA, since the broker is not a carrier, charterer or holder of the bill of lading (Reyma Brokerage Inc. v. Philippine Home Assurance Corporation, 202 SCRA 564).

Written claims do not toll the running of the one-year prescriptive period under the COGSA since matters affecting the transportation of goods by sea must be decided as soon as possible (Dole Philippines, Inc. v. Maritime Company of the Philippines, G.R. No. L-61352, Feb. 27, 1987).

Amount of the carrier’s liability under the COGSA

Persons who can give notice to, and bring suit against the carrier (SCA) 1. 2. 3.

1.

The Shipper The Consignee; or Any legal holder of the bill of lading like the indorsee, subrogee, or the insurer of the goods (Kuy v. Everett Steamship Corporation, G.R. No. L-5554, May 27, 1953).

2.

NOTE: When the packages are shipped in a container supplied by carrier and the number of such units is stated in the bill of lading, each unit and not the container constitute the “package.”

The one-year prescriptive period within which to file a case against the carrier also applies to a claim filed by an insurer who stands as a subrogee to the insured

Instances where there is no liability under COGSA (FDUD)

The one-year prescriptive period within which to file a case against the carrier also applies to a claim filed by an insurer who stands as a subrogee to the insured. Also, whether the insurer files a third party complaint or maintains an independent action is of no moment (Filipino Merchants Insurance Co., Inc. v. Alejandro, G.R. No. L-54140,Oct. 14, 1986).

1. 2. 3. 4.

If the nature or value of goods knowingly and Fraudulently misstated by shipper If damage resulted from Dangerous nature of shipment loaded without consent of carrier If Unseaworthiness not due to negligence If Deviation was to save life or property at sea.

Q: Clause 18 of the bill of lading provides that the owner should not be liable for loss or damage of cargo unless written notice thereof was given to the carrier within 30 days after receipt of the goods. However, Section 3 of the COGSA provides that even if a notice of loss or damage is not given, "that fact shall not affect or prejudice the right of the shipper to bring suit within one year after the delivery of the goods." Which of these two provisions should prevail?

Where an insurer was sued by the consignee of imported goods filed a third-party complaint against the carrying vessel more than a year after the delivery of the goods, the third party complaint is barred by the one-year prescriptive period under the Carriage of Goods by Sea Act, as otherwise the prescriptive period can be avoided by the consignee by filing a claim against the insurer (Filipino Merchant Insurance Co., Inc. v. Alejandro, 145 SCRA 42). NOTE: The ruling in the above-cited case should apply only to suits against the carrier filed either by the shipper, the consignee or the insurer, not to suits by the insured against the insurer. The basis of the insurer’s liability is the insurance contract and such claim prescribes in 10 years, in accordance with Art. 1144 of the Civil Code (Mayer Steel Pipe Corporation v. CA, G.R. No. 124050, June 19, 1997).

A: Section 3 will prevail. Any clause, Sec. 3 of the COGSA provides that any covenant, or agreement in a contract of carriage relieving the carrier or the ship from liability for loss or damage to or in connection with the goods or lessening such liability otherwise than as provided, shall be null and void and of no effect." (E. E. Elser, Inc. v. CA, G.R. No. L-6517, Nov. 29, 1954).

Prescriptive period in case of misdelivery and conversion of goods In case of misdelivery or conversion, the proper periods are: 1. If there is a written contract – 10 years (Civil Code, Art. 1144) 2. Oral contract – 6 years (Art. 1145) 3. For quasi-delict – 4 years (Art. 1146)

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

The liability limit is set at $500 per package or customary freight unless the nature and value of such goods is declared by the shipper. Shipper and carrier may agree on another maximum amount, but not more than amount of damage actually sustained.

THE WARSAW CONVENTION Warsaw Convention (WC) for Unification of Certain Rules Relating to International Carriage by Air provides for rules applicable to international transportation by air. The Philippines is one of the signatories to WC (Santos III vs. Northwest Orient

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TRANSPORTATION LAWS Airlines, 210 SCRA 256). Hence, this has the force and effect of a law in the Philippines (Cathay Pacific Airways, Ltd. Vs. CA, 219 SCRA 520).

Function of the air consignment note It is prima facie evidence of: 1. The conclusion of the contract 2. Receipt of the goods 3. Conditions of carriage (WC, Art. 11 [1]).

APPLICABILITY Applicability of the Warsaw convention

Exercise of the consignor of its right to dispose of the goods

This Convention applies to all international carriage of persons, luggage or goods performed by aircraft for reward. It applies equally to gratuitous carriage by aircraft performed by an air transport undertaking (Art. 1[1], Warsaw Convention).

The consignor may exercise its right to dispose of the goods by: 1. Withdrawing them at the aerodrome of departure or destination, or 2. Stopping them in the course of the journey on any landing, or 3. Calling for them to be delivered at the place of destination or in the course of the journey to a person other than the consignee named in the air consignment NOTE, or 4. Requiring them to be returned to the aerodrome of departure (WC, Art. 12).

International carriage Any carriage in which, according to the contract made by the parties, the place of departure and the place of destination, whether or not there be a break in the carriage or a transshipment, are situated either: 1. Within the territories of two High Contracting Parties; or 2. Within the territory of a single High Contracting Party, if there is an agreed stopping place within a territory subject to the sovereignty, suzerainty, mandate or authority of another Power, even though that Power is not a party to the Convention (WC, Art. 1[2])

NOTE: In the exercise of this right, the carrier or other consignors must not be prejudiced. For the carrier to obey the orders for disposition, the carrier must require the production of the part of the air consignment NOTE delivered to the consignor (ibid).

Time when the right to disposition ceases to continue

NOTE: High Contracting Parties are the signatories to the WC and those which subsequently adhered to it. (Mapa vs. CA, 275 SCRA 286.)

It ceases as soon as the consignee, on arrival of the goods at the place of destination, require the carrier to hand over to him the air consignment note and to deliver the goods to him, on payment of charge due and on complying with the conditions of carriage set out in the air consignment note (Art. 13, WC)

Q: How should carriage performed by several successive air carriers be treated under Warsaw Convention? A: A carriage to be performed by several successive air carriers is deemed, for the purposes of WC to be one undivided carriage, if it has been regarded by the parties as a single operation, whether it had been agreed upon under the form of a single contract or of a series of contracts (WC, Art. 1 [3]).

Where the supervisor of the consignee signed the delivery receipt for the goods shipped, the consignee cannot sue the shipping company for non-delivery of the goods (Republic v. Lorenzo Shipping Corporation, 450 SCRA 550).

NOTE: Such carriage does not lose its international character merely because one contract or a series of contracts is to be performed entirely within a territory subject to the sovereignty, suzerainty, mandate or authority of same High Contracting Party (Ibid).

LIABILITIES UNDER THE CONVENTION: 1. Damage sustained in the event of the death or wounding of a passenger taking place on board the aircraft or in the course of any of the operations of embarking or disembarking; 2. Loss or damage to any check baggage or goods sustained during the transport by air; 3. Delay in the transport by air of passengers, baggage or goods.

Documents of carriage issued under WC The following are the documents of carriage: 1. Passenger Ticket 2. Luggage Ticket 3. Air Consignment NOTE

NOTE: The list is not exclusive.

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MERCANTILE LAW Time when extinguished

Venue in the filing of an action for violation of a contract of international carriage

to

damages will be

NOTE: Despite the express mandate that an action for damages should be filed within 2 years from the arrival at the place of destination, such rule shall not be applied where delaying tactics were employed by airline itself in a case where a passenger wishes to settle his complaint out-of-court but the airline gave him the runaround, answering the passenger’s letters but not giving in to his demands, hence, giving the passenger no time to institute the complaint within the reglementary period (United Airlines v. Uy, G.R. No. 127768, Nov. 19, 1999).

LIMITATION OF LIABILITY Limitations to the liability of air carriers 1. In the carriage of persons – 250,000 francs for each passenger. Nevertheless, by special contract, the carrier and the passenger may agree to a higher limit of liability.

A person cannot recover a claim covered by Warsaw Convention after the lapse two years

2. In the carriage of registered baggage and of cargo – Two hundred and fifty (250) francs per kilogramme, unless the passenger or consignor has made, at the time when the package was handed over to the carrier, a special declaration of interest in delivery at destination and has paid a supplementary sum if the case so requires.

A claim covered by the Warsaw Convention can no longer be recovered under local law, if the statute of limitations of two years has already lapsed (PAL. v. Savillo, 557 SCRA 66). However, the action filed by a passenger of an airline company for loss of his luggage is not barred by the two-year prescriptive period under the Warsaw Convention, where the passenger immediately made a demand upon the airline company and the action was delayed because of the evasion of the airline company (United Air Lines, Inc. v. Court of Appeals, 318 SCRA 576).

3. As regards objects of which the passenger takes charge himself – Five thousand (5,000) francs per passenger (WC, Art. 22). NOTE: Carrier is not entitled to the foregoing limit if the damage is caused by willful misconduct or default on its part (WC, Art. 25). Where the loss of the baggage of a passenger was due to the fault or recklessness of an airline company, the limitation on the liability of airline companies under the Warsaw Convention is not applicable (Alitalia v. IAC, 192 SCRA 9).

Where an airline company failed to deliver the baggage of a passenger on time, a passenger may maintain an action for damages under the Civil Code even if he did not file a claim with the airline company within fourteen days as required by the Warsaw Convention, for he may still sue under the Civil Code (Luna v. CA, 216 SCRA 107).

Stipulation relieving the carrier from or limiting its liability is not valid Any provision tending to relieve the carrier of liability or to fix a lower limit than that which is laid down in this Convention shall be null and void but the nullity of such provision does not involve the nullity of the whole contract (Art. 23[1]). Exceptions to these limitations (WD-PG) Willful misconduct Default amounting to willful misconduct Accepting passengers without ticket Accepting goods without airway bill or baggage without baggage check

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

right

The right to damages shall be extinguished if an action is not brought within two years, reckoned from the date of arrival at the destination, or from the date on which the aircraft ought to have arrived, or from the date on which the carriage stopped.

An action for damage must be brought at the option of the plaintiff, in the territory of one of the High Contracting Parties, either before the court: 1. of the domicile of the carrier or 2. of his principal place of business, or 3. where the ticket was purchased, or 4. at the place of destination (WC, Art. 28 [1]).

1. 2. 3. 4.

the

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TRANSPORTATION LAWS WILLFULL MISCONDUCT Willful misconduct The definition of "willful misconduct" depends in some measure on which court is deciding the issue. Some common factors that courts will consider are: 1. Knowledge that an action will probably result in injury or damage 2. Reckless disregard of the consequences of an action, or 3. Deliberately failing to discharge a duty related to safety. Courts may also consider other factors. The failure of the carrier to deliver the passenger’s luggage at the designated time and place does not ipso facto constitutes willful misconduct There must be a showing that the acts complained of were impelled by an intention to violate the law, or were in persistent disregard of one's rights. It must be evidenced by a flagrantly or shamefully wrong or improper conduct (Luna vs. CA, GR No. 100374-75, November 27, 1992). The act of the carrier in guessing which luggage contained the firearm constitutes willful misconduct The guessing of which luggage contained the firearms amounted to willful misconduct under Section 25(1) of the Warsaw Convention (Northwest Airlines vs. CA, GR No. 120334, January 20, 1998). The allegation of willful misconduct resulting in a tort is insufficient to exclude the case from the realm of Warsaw Convention A cause of action based on tort did not bring the case outside the sphere of the Warsaw Convention (Lhuiller vs. British Airways, GR No. 171092, March 15, 2010).

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MERCANTILE LAW Congress cannot create a private corporation by enactment of a special law

THE CORPORATION CODE (CC) CORPORATION

Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations (Sec. 16, Art. XII, Constitution).

DEFINITION A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence (Sec. 2, CC).

Franchise A franchise includes any special privilege or right affected with public interest, conferred by the State on corporations or persons and which does not belong to the citizens of the country, generally as a matter of common right (De Leon, 2010, citing JRS Business Corp. vs. Imperial Insurance, Inc., 11 SCRA 634).

ATTRIBUTES OF A CORPORATION Attributes The attributes of a corporation are the following: (ALS– PAPI)

Kinds of franchise

1. 2. 3. 4.

The kinds of franchise are the following: 1. Primary/ Corporate/ General Franchise – the right to exist as a corporation. 2. Secondary/ Special Franchise – the franchise to exercise powers and privileges granted to such corporation to the business for which it was created, including those conferred for purposes of public benefit such as the power of eminent domain and other powers and privileges enjoyed by public utilities (De Leon, 2010).

It is an Artificial being It is created by operation of Law It enjoys the right of Succession It has the Powers, Attributes and Properties expressly authorized by law or Incident to its existence.

Rules for the creation of a corporation GR: A legislative grant or authority is necessary for the creation of a corporation.

Primary v. Secondary franchise

XPN: For corporations by prescription, such authority is not necessary (De Leon, 2010).

PRIMARY FRANCHISE

NOTE: A corporation by prescription is one which has exercised powers for an indefinite period without interference on the part of the sovereign power and which by fiction of law, is given the status of a corporation (De Leon, 2010).

The creation of a corporation is by operation of law

The franchise or authority to exist as a corporation

No corporation can exist without the consent or grant of the sovereign, and that the power to create corporations is one of the attributes of sovereignty. Corporations cannot come into existence by mere agreement of the parties (De Leon, 2010). NOTE: The Philippine jurisprudence adopted the Concession or fiat theory, which states that a corporation is conceived as an artificial person owing existence through creation by a foreign power. Further, a corporation has without any existence until it has received the imprimatur of the State acting according to law, through the SEC (Tayag v. Benguet Consolidated, Inc., GR No. L-23145, Nov. 29, 1968).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

GR: Granted by the Corporation Code, XPN: In GOCC’s with a special charter, a special law grants the franchise

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SECONDARY FRANCHISE Special authority given to a corporation to engage in a specialized business (e.g. banks, insurance companies, right to use the streets of a municipality to lay pipes of tracks, erect poles, or string wires). Certain rights and privileges conferred upon existing corporations (J.R.S.Business Corp. v. Imperial Insurance, supra). Granted by a Government Agency, or a Municipal Corporation

CORPORATION CODE

Cannot be transferred without the approval of Congress (Sundiang, 2011).

Rule on whether a defective incorporation result into a partnership

Secondary franchises of a corporation may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property (i.e. Through board resolution or approval of stockholders) (Villarey vs. Ferrer G.R. No. L-23893, October 29, 1968).

The answer depends on whether or not there is a clear intent to participate in the management of the business affairs on the part of the investor. Parties who intends to participate or has actually participated in the business affairs of the proposed corporation would be considered as partners under a de facto partnership. On the other hand, parties who took no part notwithstanding their subscriptions do not become partners with other subscribers (Pioneer Insurance vs. CA, GR No. 84197, July 28, 1989).

A secondary franchise can be subject to levy and sale on execution together with corporate property (Sundiang, 2011)

Engagement into a contract of partnership or a joint venture GR: Corporations have no power to enter into partnership.

Right to succession

XPN: The SEC allowed corporations to enter into partnerships with other corporations and individuals provided: 1. The authority to enter into partnership relation is expressly conferred by the Charter or the Articles of Incorporation (AOI) and the nature of the business venture to be undertaken by the partnership is in line with the business authorized by the charter or the AOI (SEC Opinions, Feb. 29, 1980, Dec. 1, 1993, and Feb. 23, 1994). 2. The partnership must be a limited partnership and the corporation must be a limited partner 3. If it is a foreign corporation, it must obtain a license to transact business in the country.

A corporation has a capacity of continuous existence irrespective of the death, withdrawal, insolvency, or incapacity of the individual stockholders or members and regardless of the transfer of their interest or shares of stock (De Leon, 2010). A corporation may exist up to the period stated in the articles of incorporation as long as not exceeding 50 years from the date of incorporation, unless sooner dissolved or unless said period is extended (Sec. 11, CC). Powers that a corporation can exercise The powers that a corporation can exercise are only those which are granted by the law of its creation. All powers which may be implied from those expressly provided by law and those which are incidental or essential to the corporation’s existence may also be exercised (Sec. 36, CC).

Joint Account v. Partnership JOINT ACCOUNT Has no firm name and is conducted In the name of the ostensible partner. Has no juridical personality and can sue or be sued only in the name of the ostensible partner. Has no common fund. The ostensible partner manages its business operations. Liquidation thereof can only be done by the ostensible partner.

The power to institute expropriation proceedings is not granted to all corporations Only quasi-public corporations or those affected with public interest are given the power to institute condemnation proceedings against owners of private property. To grant the right of eminent domain to purely private entities exercising functions, which are not public in nature, would be using the right to take property for private use (De Leon, 2010 citing SEC Opinion, Oct. 28, 1968).

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PARTNERSHIP Has a firm name.

Has juridical personality and may sue or be sued under its firm name

Has a common fund. All general partners have the right of management. Liquidation may, by agreement, be entrusted to a partner or partners.

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Corporation v. Partnership BASIS As to creation and governing law

Commencement of juridical personality and term of existence

PARTNERSHIP Created by mere agreement of the parties and governed by the Civil Code

CORPORATION Created by operation of law and governed by the Corporation Code

From the moment of meeting of /minds of the partners

Existence of the corporation commences from the date of issuance of the Certificate of Incorporation by the Securities and Exchange Commission (SEC).

The term of a partnership may be established for any period of time stipulated by the partners

May be organized by at least 2 persons Number incorporators

of

GR: May exercise any power authorized by the partners. Powers XPN: Acts which are contrary to law, morals, good customs, public order, public policy When management is not agreed upon, every partner is an agent of the partnership

Management

Effect of mismanagement

Extent of liability to third persons Right of Succession Transferability of Share Holder’s interest

A partner as such can sue a co-partner who mismanages. GR: Partners are liable personally and subsidiarily(sometimes solidarily) for partnership debts to third persons XPN: Limited partner No right of succession Partner cannot transfer his interest in the partnership without the consent of all the other existing partners.

Existence can NOT be for a term in excess of 50 years. The term of a corporation may be extended to not more than 50 years at any single instance.

GR: Requires at least 5 incorporators but not more than 15. XPN: Corporation sole May exercise only such powers as may be granted by law and its articles of incorporation, implied therefrom or incidental thereto.

GR: Power to do business and manage its affairs is vested in the Board of Directors (BOD) / Board of Trustees (BOT). XPNs: 1) Executive Committee (Sec. 35, CC) 2) Management Contract (Sec. 44, CC) 3) The AOI of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors (Sec. 97, CC). The suit against a member of the BOD or BOT who mismanages must be brought in the name of the corporation (Derivative suit). Stockholders are liable only to the extent of the shares subscribed by them whether paid or not.

May be dissolved any time by the will of any or all of the partners.

Has right of succession Stockholder has the right to transfer his shares without prior consent of the other stockholders unless the right of first refusal is embodied in the articles of incorporation. Can only be dissolved with the consent of the State.

Death, civil interdiction and insolvency of a partner dissolve the partnership.

Death or insolvency of shareholders can’t dissolve the corporation.

Dissolution

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CORPORATION CODE CLASSES OF CORPORATION

8.

As to their relation to another corporation: a. Parent or Holding‐ one which is related to another corporation that it has the power either, directly or indirectly to, elect the majority of the director of such other corporation b. Subsidiary‐ 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 9. As to whether they are corporations in a true sense or only in a limited sense: a. True‐ one which exists by statutory authority b. Quasi‐ one which exist without formal legislative grant. i. Corporation by prescription‐ one which has exercised corporate powers for an indefinite period without interference on the part of the sovereign power and which by fiction of law, is given the status of a corporation; ii. Corporation by estoppel‐ one which in reality is not a corporation, either de jure or de facto, because it is so defectively formed, but is considered a corporation in relation to those only who, by reason of theirs acts or admissions, are precluded from asserting that it is not a corporation (Sec. 21, CC). 10. As to whether they are for public (government) or private purpose: a. Public‐ one formed or organized for the government of a portion of the State. b. Private- one formed for some private purpose, benefit or end.

Classes of corporation The following are the classes of corporation: 1. As to whether their membership is represented by shares of stock or not: a. Stock‐ one which have capital stock divided into shares and are authorized to distribute to the holders of such shares dividends or allotments or the surplus profits on the basis of the shares held (Sec. 3, CC). b. Non-Stock‐ is one which do not issue shares and are created not for profit but for public good and welfare and where no part of its income is distributable as dividends to its members, trustees, or officers (Sec. 87, CC). 2. As to the number of persons who compose them: a. Corporation aggregate ‐ corporation consisting of more than one member or corporator. The CC requires that these corporations must be formed by “not less than 5 persons” (Sec. 10, CC). b. Corporation Sole‐ religious corporation which consists of one member or corporator only and his successor. 3. As to whether they are for religious purpose or not: a. Ecclesiastical corporation‐ one organized for religious purpose. b. Lay corporation‐ one organized for a purpose other than for religion. 4. As to whether they are for charitable purpose or not: a. Eleemosynary‐ one established for religious purposes. b. Civil‐ one established for business or profit. 5. As to state or country under or by whose laws they have been created: a. Domestic‐ one incorporated under the laws of the Philippines b. Foreign‐ 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 (Sec. 123, CC). 6. As to their legal right to corporate existence: a. De jure‐ one existing both in fact and in law b. De facto‐ one existing in fact but not in law 7. As to whether they are open to the public or not: a. Close‐ one which is limited to selected persons or members of the family (Sec. 96‐ 105, CC). b. Open‐ one which is open to any person who may wish to become a stockholder or member thereto.

Requisites for the formation of a stock corporation For a stock corporation to exist, two requisites must be complied with, to wit: 1. A capital stock divided into shares and 2. An authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held (Sec. 3, CC; Collector of Internal Revenue vs Club Filipino de Cebu 5 SCRA 321). Requisites of a de facto corporation (LAP) 1. Organized under a valid Law. 2. Attempt in good faith to form a corporation according to the requirements of the law. NOTE: Issuance of Certificate of Incorporation by SEC is a minimum requirement for the formation of the Corporation in good faith (Sundiang, 2009).

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MERCANTILE LAW 3. Use of corporate Powers - The corporation must have performed the acts which are peculiar to a corporation like entering into a subscription agreement, adopting by-laws, and electing directors.

account of a technical defect in the formation of the corporation. On the other hand, where an attempt to organize a corporation fails by omission of some substantial step or proceeding required by the law, its members or stockholders are liable as partners (De Leon, 2010).

Q: University Publishing Company (UPC), through its president, entered into a contract with Albert to publish the commentaries on the Revised Penal Code. UPC published the commentaries but it did not remit the amount due to Albert. This prompted Albert to file a collection suit. The RTC decided against UPC. When the Sheriff were about to implement the writ of execution against the company, he discovered that UPC is not registered corporation. Consequently, the president of UPC was substituted in the writ of execution. The president invoked the separate legal personality of the corporation as his defense. 1) Is UPC a de facto corporation? 2) Can the defense that UPC is a corporation by estoppel be invoked by the president? 3) Who is liable for the debts of the corporation?

The existence of a de facto corporation cannot be collaterally attacked GR: The existence of a de facto corporation shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding (Sec. 20, CC). XPN: Collateral attack will be permitted, however, when the lack of right or the wrong doing of the corporation is in issue because it is in violation of public policy or of express or implied statutory requirement, such as denial of its right to enforce contracts entered into without compliance with prohibitions of express or implied statutory or public policy.

A: 1. No. UPC cannot be a considered a de facto corporation because it was not registered with the SEC 2. No. One who has induced another to act upon his willful misrepresentation that a corporation was duly organized and existing under the law, cannot thereafter set up against his victim the principle of corporation by estoppel. 3. The president, who negotiated with Albert is liable. A person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent (Albert v University Publishing Co. G.R. No. L-19118, January 30, 1965).

Thus, the defendant may question the personality of a foreign corporation transacting business in the Philippines to maintain a suit on the ground that it is not duly licensed to do business in our country (De Leon, 2010, citing 18 Am. Jur. 2d 606 and Sec. 133 of the CC). De facto corporation v. De jure corporation DE FACTO One which actually exists for all practical purposes as a corporation but which has no legal right to corporate existence as against the State. There is a colorable compliance with the requirements of the law creating the corporation. Can be attacked directly but not collaterally.

Liabilities of officers and directors/ trustees of a de facto corporation The liabilities and penalties attending to officers and directors/ trustees of a de jure corporation shall be the same as those of a de facto corporation. This includes the liability under the criminal law. Members of a de facto corporation cannot be held liable as partners by third persons The members of a de facto corporation cannot be held liable as partners by third persons who deal with them in their supposed corporate capacity, merely on UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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DE JURE One created in strict or substantial conformity with the mandatory statutory requirements for incorporation.

There is substantial compliance with the requirements of the law creating the corporation. Its right to exist as a corporation cannot be successfully attacked or questioned by any party even in direct proceeding for that purpose by the State (De Leon, 2010).

CORPORATION CODE Rules governing a corporation by estoppel 1.

2.

3.

estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be without valid existence, are held liable as general partners. Technically, it is true that Lim did not directly act on behalf of the corporation. However, having reaped the benefits of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel (Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., G.R. No. 136448, November 3, 1999).

All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result. When any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation (Sec. 21, CC).

De facto corporation v. Corporation by estoppel DE FACTO CORPORATION There is existence in law

NOTE: Where there is no third person involved and the conflict arises only among those assuming the form of a corporation who know that the corporation has not been registered, there is NO corporation by estoppel (Lozano v Judge Delos Santos G. R. No. 125221).

The dealings among the parties on a corporate basis is not required The State reserves the right to question its existence through a quo warranto proceeding Stockholders in a de facto corporation are liable as a de jure corporation

Q: On behalf of Ocean Quest Fishing Corporation, Antonio Chua and Peter Yao entered into a contract for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The buyers failed to pay for the fishing nets and the floats; hence, Philippine Fishing Gear filed a collection suit against Chua, Yao and Lim Tong Lim. The suit was brought against the three in their capacities as general partners, on the allegation that Ocean Quest Fishing Corporation was a nonexistent corporation. The trial court ruled in favor of Philippine Fishing Gear and that Chua, Yao and Lim are liable as general partners. Lim contends that the doctrine of corporation by estoppel applies only to Yao and Chua. Lim insists that only those who dealt in the name of the ostensible corporation should be held liable. Since his name does not appear on any of the contracts and since he never directly transacted with the Ocean Quest Fishing Corporation, ergo, he cannot be held liable. Is Lim jointly liable with Chua and Yao?

CORPORATION BY ESTOPPEL There is no existence in law The dealings among the parties on a corporate basis is required Quo warranto proceeding is not applicable Stockholders are liable as general partners for all debts, liabilities and damages incurred

A religious group is not required to be registered as a corporation The Corporation Code does not require any religious groups to be registered as a corporation but if it wants to acquire legal personality, its members should incorporate under the Code. Organization of a corporation sole A corporation sole is organized by the mere filing of a verified articles of incorporation by the head of any religious denomination, sect or church with the SEC without the need of an issuance of a certificate of incorporation. Once filed, a separate juridical character is acquired which is separate and distinct from his natural character.

A: Yes. Lim should be held liable jointly with Chua and Yao. Unquestionably, Lim benefited from the use of the nets found inside F/B Lourdes, the boat which has earlier been proven to be an asset of the partnership. Lim, Chua and Yao decided to form a corporation. Although it was never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the three as contracting parties in representation of it. Clearly, under the law on

NOTE: A corporation sole is not required to file by-laws, it is governed by the rules, regulations and discipline of its religious denomination, sect or church.

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MERCANTILE LAW Nationality of a corporation sole

nationality of the actual incumbent of the parish (the Corporation Sole or the head of the church or congregation) (De Leon, 2010, citing SEC Opinions, Nov. 6, 1990 and Sept. 21, 1993).

A corporation sole does not have any nationality but for purposes of applying nationalization laws, nationality is determined not by the nationality of its presiding elder but by the nationality of its members, constituting the sect in the Philippines. Thus, the Roman Catholic Church can acquire lands in the Philippines even if it is headed by the Pope (Roman Catholic Apostolic Church v. Land Registration Commission, G.R. No. L-8451, Dec. 20, 1957).

Alienation of properties by a corporation sole A corporation sole may alienate properties by: 1. Obtaining an order from the RTC of the province where the property is situated after notice of the application for leave to sell or mortgage has been given by publication or otherwise and by showing that it is for the interest of the corporation that leave to sell or mortgage should be granted.

Acquisition of property by a corporation sole A corporation sole may acquire property even without court intervention by purchase, donation and other lawful means (ibid).

2.

Q: Father X, an American priest who came from New York, registered the Diocese of Bacolod of the Roman Catholic Church which was incorporated as a corporation sole. There were years when the head of the Diocese was a Filipino, but there were more years when the heads were foreigners. Today, the head is an American again. Y donated a piece of land located in Bacolod City for use as a school. Which statement is most accurate? (2012 Bar Question) a. The Register of Deeds of Bacolod City can refuse to register and transfer the title because the present head of the corporation sole is not a Filipino. b. The nationality of a corporation sole depends upon the nationality of the head at any given time. c. A corporation sole, regardless of the nationality of the head, can acquire real property either by sale or donation. d. A corporation sole is not legally allowed to own real property.

Dissolution of a corporation sole is not necessary for it to become a corporation aggregate There is no point in dissolving the corporation sole of one member to enable the corporation aggregate to emerge from it. The Corporation Code provides no specific mechanism for amending the articles of incorporation of a corporation sole but Section 109 of the Corporation Code allows the application to religious corporations of the general provisions governing non-stock corporations. In non-stock corporations, the amendment needs the concurrence of at least two-thirds of its membership. If such approval mechanism is made to operate in a corporation sole, its one member in whom all the powers of the corporation technically belongs, needs to get the concurrence of two-thirds of its membership (Iglesia Evangelica Metodista v. Bishop Lazaro. GR. 184088 July 6, 2010).

A: C. “Any corporation sole may purchase and hold real estate and personal property for its church, charitable, benevolent or educational purposes, and may receive bequests or gifts for such purposes” (Sec. 113, CC).

Q: A Special Audit Team from COA audited the accounts of Leyte Metropolitan Water District (LMWD). Subsequently, LMWD received a a request for payment of auditing fees from COA. As General Manager of LMWD, Engr. Feliciano sent a reply informing COA that the water district could not pay the auditing fees. Feliciano cited as basis for his action Presidential Decree 198 (PD 198) as well as Republic Act No. 6758 (RA 6758). Thereafter, Feliciano asked COA for refund of all auditing fees LMWD previously paid to COA. The COA Chairman

Being a mere administrator of the temporalities or properties titled in his name, constitutional provisions requiring 60 (or 100) per centum Filipino ownership are not applicable to the corporation sole. The ownership thereof devolves upon the church or congregation acquiring the same. To own the property, compliance with the constitutionally required 60 (or 100) per centum Filipino capital is determined by the nationality of the constituents of the diocese (church or congregation), and not the UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

In cases where the rules, regulations and discipline of the religious denomination, sect or church, religious society or order concerned represented by such corporation sole regulate the method of acquiring, holding, selling and mortgaging real estate and personal property, such rules, regulations and discipline shall control, and the intervention of the courts shall not be necessary (Sec. 113, CC).

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CORPORATION CODE denied LMWD’s request. Feliciano maintains that LWDs are not GOCCs with original charters. He argues that LWDs are private corporations, and thus LWDs are not subject to COA’s jurisdiction. Is a Local Water District created under PD 198, as amended, a government-owned or controlled corporation subject to the audit jurisdiction of COA?

timely, effective and compassionate humanitarian assistance for the most vulnerable without consideration of nationality, race, religion, gender, social status or political affiliation. This does not mean however that the charter of PNRC is unconstitutional. PNRC has a sui generis status. Although it is neither a subdivision, agency or instrumentality of the government nor a GOCC or a subsidiary thereof, so much so that Gordon was correctly allowed to hold his position as Chairman thereof concurrently while he served as a Senator, such a conclusion does not ipso facto imply that the PNRC is a private corporation within the contemplation of the provision of the Constitution, that must be organized under the Corporation Code. The PNRC enjoys a special status as an important ally and auxiliary of the government in the humanitarian field in accordance with its commitments under international law (Dante V. Liban, et al., v. Richard J. Gordon, G. R. No. 175352, January 18, 2011).

A: Yes. LWDs are GOCCs subject to the audit jurisdiction of COA. The Constitution and existing laws mandate COA to audit all government agencies, including GOCCs with original charters. An LWD is a GOCC with an original charter. The Constitution recognizes two classes of corporations. The first refers to private corporations created under a general law. The second refers to GOCCs created by special charters. Congress cannot enact a law creating a private corporation with a special charter. Such legislation would be unconstitutional. Private corporations may exist only under a general law. The Constitution authorizes Congress to create GOCCs through special charters. Since private corporations cannot have special charters, it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled. Obviously, LWDs are not private corporations because they are not created under the Corporation Code (Engr. Ranulfo C. Feliciano, et al., v. COA, G.R. No. 147402, January 14, 2004).

Q: Benedicto was a stockholder of RPN, a private corporation duly registered with SEC. The Government ordered the sequestration of RPN’s properties, assets, and business. Thereafter, PCGG entered into a compromise agreement with Benedicto, whereby he ceded to the Government, all his shares of stock in RPN. Consequently, upon motion of the PCGG, the Sandiganbayan directed the president and corporate secretary of RPN to transfer to the PCGG Benedicto’s shares representing 72.4% of the total issued and outstanding capital stock of RPN. However, Benedicto moved for a reconsideration, contending that his RPN shares ceded to the Government, through the PCGG, represented only 32.4% of RPN’s outstanding capital stock, not 72.4%. Benedicto’s motion for reconsideration has remained unresolved. Carandang assumed office as general manager and chief operating officer of RPN. Subsequently, Carandang and other RPN officials were charged with grave misconduct before the Ombudsman. The charge alleged that Carandang had entered into a contract with AF Broadcasting Incorporated despite his being an incorporator, director, and stockholder of that corporation and that he had thus held financial and material interest in a contract that had required the approval of his office. Carandang argues that the Ombudsman had no jurisdiction over him because RPN was is not a GOCC. Is RPN a GOCC?

Q: In the July 15 2009 Decision the Court held that Richard Gordon did not forfeit his seat in the Senate when he accepted the chairmanship of the PNRC Board of Governors, as the office of the PNRC Chairman is not a government office or an office in a government-owned or controlled corporation for purposes of the prohibition in Section 13, Article VI of the 1987 Constitution. The Decision, however, further declared void the PNRC Charter insofar as it creates the PNRC as a private corporation and consequently ruled that the PNRC should incorporate under the Corporation Code and register with the SEC if it wants to be a private corporation. Philippine National Red Cross (PNRC) then filed a Motion for Partial Reconsideration praying that the Court sustain the constitutionality of its Charter. Is PNRC a private corporation? A: No. PNRC is not a private corporation. Although the PNRC was created by a special charter, it cannot be considered as a GOCC in absence of the essential elements of ownership and control by the government. It does not have government assets and does not receive any appropriation from the Philippine Congress. It is a non-profit, donor-funded, voluntary organization, whose mission is to bring

A: No. RPN is not a GOCC. A GOCC is a stock or a non-stock corporation, whether performing governmental or proprietary functions, which is directly chartered by a special law or if organized

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MERCANTILE LAW under the general corporation law is owned or controlled by the government directly, or indirectly through a parent corporation or subsidiary corporation, to the extent of at least a majority of its outstanding capital stock or of its outstanding voting capital stock. It is vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the government directly or indirectly through its instrumentalities either wholly, or where applicable as in the case of stock corporations to the extent of at least 51% of its capital stock. Although it is true that the Sandiganbayan ordered the transfer to the PCGG of Benedicto’s shares that represented 72.4% of the total issued and outstanding capital stock of RPN, such quantification of Benedicto’s shareholding cannot be controlling in view of Benedicto’s timely filing of a motion for reconsideration whereby he clarified and insisted that the shares ceded to the PCGG had accounted for only 32.4%, not 72.4%, of RPN’s outstanding capital stock. With the extent of Benedicto’s holdings in RPN remaining unresolved with finality, concluding that the Government held the majority of RPN’s capital stock as to make RPN a GOCC would be bereft of any factual and legal basis (Antonio M. Carandang v. Aniano A. Desierto, et al., G.R. No. 148076, January 12, 2011).

Philippine National under the Foreign Investments Act of 1991. This is the only exception to the place of incorporation test (SEC Opinion No. 04-14, March 3, 2004; De Leon, 2010). CONTROL TEST Control test In determining the nationality of a corporation, the control test uses the nationality of the controlling stockholders or members of the corporation. This test was adopted by the Foreign Investment Act of 1991 (RA 7042) as a general guideline in determining the nationality of corporations engaged in a nationalized activity (Sec Opinion No. 07-20, Nov 20, 2007). Requisites of the control test (CFC) 1. Control, not mere majority or complete stock control, but Complete domination, not only of finances but of policy and business practice in respect to the transaction attacked such that the corporate entity as to this transaction had at that time no separate mind, will or existence of its own; 2. Such control must have been used by the defendant to commit Fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest or unjust act in contravention of plaintiffs legal right; and 3. The control and breach of duty must proximately Cause the injury or unjust loss complained of (Velarde v. Lopez, Inc., G.R. No. 153886, Jan. 14, 2004; Heirs of Ramon Durano, Sr. v. Uy, G.R. No. 136456, Oct. 24, 2000).

NATIONALITY OF CORPORATIONS Tests in determining the nationality of corporations 1. 2. 3.

4.

Place of Incorporation test Control test Grandfather rule – Nationality is attributed to the percentage of equity in the corporation used in nationalized or partly nationalized area. This test is an exception to the Control Test and was applied by the SEC in several cases. Domiciliary test – Determined by the principal place of business of the corporation.

Who are considered as Philippine Nationals Under RA 7042 (Foreign Investment Act of 1991), the following are considered Philippine Nationals: 1. Corporations organized under Philippine laws of which 60% of the capital stock outstanding and entitled to vote is owned and held by Filipino citizens.

PLACE OF INCORPORATION TEST Place of incorporation test In using the Place of Incorporation test, the nationality of a corporation is determined by the state of incorporation, regardless of the nationality of the stockholders.

NOTE: RA 7042 provides that where a corporation and its non-Filipino stockholders own stocks in a SEC-registered enterprise, at least 60% of the capital stock outstanding and entitled to vote of both corporations and at least 60% of the members of the board of directors of both corporations must be Filipino citizens (DOUBLE 60% RULE).

XPN: A corporation organized/incorporated abroad and registered as doing business in the Philippines under the Corporation Code, of which 100% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos, may be considered a UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

2. Corporations organized abroad and registered as doing business in the Philippines under the

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CORPORATION CODE Corporation Code of which 100% of the capital stock entitled to vote belong to Filipinos. Q: What is the nationality of a corporation organized and incorporated under the laws of a foreign country, but owned 100% by Filipinos? (1998 Bar Question)

3.

A: Under the control test of corporate nationality, a corporation organized and incorporated under the laws of a foreign country, but owned 100% by Filipinos is classified as a Philippine National. Where the grounds for piercing the veil of corporate entity are present, the corporation will follow the nationality of the controlling members or stockholders, since the corporation will then be considered as one and the same.

in doubt (DOJ Opinion No. 19, s. 1989). If the stockholder corporation is 60% or more owned by Filipinos, all the stock held by the stockholder corporation is deemed to be held by Filipinos. When there is doubt as to the actual extent of Filipino equity in the investee corporation, the SEC is not precluded from using the Grandfather Rule (SEC-OGC Opinion No. 22-07 dated December 7, 2007).

Q: Several American doctors wanted to set up a group clinic in the Philippines so they could render modern medical services. If the clinic is to be incorporated under our laws, what is the required foreign equity participation in such a corporation? (2011 Bar Question) A: 0%

GRANDFATHER RULE Application of the Grandfather Rule in determining the nationality of a corporation

NATIONALIZED ACTIVITIES RESERVED FOR FILIPINOS UNDER THE CONSTITUTION AND SPECIAL LAW

To ensure compliance with the constitutional limitation(s) of corporations engaging in nationalized activities, the nationality of a corporation must be determined by ascertaining if 60% of the investing corporation’s outstanding capital stock is owned by “Filipino citizens”, or as interpreted, by natural or individual Filipino citizens. If such investing corporation is in turn owned to some extent by another investing corporation, the same process must be observed (Redmont Consolidated Mines Corporation vs. McArthur Mining Corporation, SEC En Banc Case No. 09-09-177, March 25, 2010).

100% Filipino Owned (Zero percent (0%) foreign equity) (Code: CoFi AMMaN Co. – ProMiSe- US$2.5M) 1. 2.

COoperatives (Art. 26, Ch. III, R.A. 6938); Manufacture of FIrecrackers and other pyrotechnic devices (Sec. 5, R.A. 7183). 3. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons and Anti-personnel mines (Various treaties to which the Philippines is a signatory and conventions supported by the Philippines). 4. Mass media except recording 5. Utilization of MArine resources (Sec. 2, Art. XII, Constitution); 6. Manufacture, repair, stockpiling and/or distribution of Nuclear weapons (Sec. 8, Art. II, Constitution); 7. COckpits (Sec. 5, P.D. 449); 8. Practice of all PROfessions 1. Law 2. Medicine and allied professions 3. Accountancy, etc. 9. Small-scale MIning (Sec. 3, R.A. 7076); 10. Private SEcurity agencies (Sec. 4, R.A. 5487);

Reason: One must not stop until the citizenships of the individual or natural stockholders of layer after layer of investing corporations have been established, for this is the very essence of the Grandfather Rule (ibid). Rules governing the application of the Grandfather Rule 1.

2.

The grandfather rule should be used in determining the nationality of a corporation engaged in a partly nationalized activity (SEC-OGC Opinion No. 10-31, December 9, 2010). This applies in cases where the stocks of a corporation are owned by another corporation with foreign stockholders exceeding 40% of the capital stock of the corporation. The Grandfather Rule will not apply in cases where the 60-40 Filipino-alien equity ownership in a particular natural resource corporation is not

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MERCANTILE LAW 11. Retail trade enterprises with paid-up capital of less than US$2.5 M (Sec. 5, R.A. 8762);

60 % Filipino Owned (Up to twenty percent (40%) foreign equity) (Code: Go LEARN CUPIDCo)

80 % Filipino Owned (Up to twenty percent (20%) foreign equity) (Code: Prc) 1.

1. Contracts for the supply of materials, goods and commodities to GOCC, agency or municipal corporation (Sec. 1, R.A. 5183); 2. Ownership of private Lands (Sec. 7, Art. XII, Constitution; Sec. 22, Ch. 5, CA 141; Sec. 4, R.A. 9182); 3. Ownership/establishment and administration of Educational institutions (Sec. 4, Art. XIV, Constitution); 4. Adjustment Companies (Sec. 323, P.D. 613); 5. Culture, production, milling, processing, trading excepting retailing, of rice and corn and acquiring, by barter, purchase or otherwise, Rice and corn and the by-products thereof (Sec. 5, P.D. 194); 6. Exploration, development and utilization of Natural resources (Sec. 2, Art. XII, Constitution); 7. Ownership of Condominium units where the common areas in the condominium project are co-owned by the owners of the separate units or owned by a corporation (Sec. 5, R.A. 4726). 8. Operation and management of public Utilities (Sec. 11, Art. XII, Constitution; Sec. 16, CA 146); 9. Project Proponent and Facility Operator of a BOT project requiring a public utilities franchise (Sec. 11, Art. XII, Constitution; Sec. 2a, R.A. 7718); 10. Manufacture, repair, storage and/ or distribution of products/ Ingredients requiring PNP clearance (R.A. 7042 as amended by R.A. 8179); 11. Operation of Deep sea commercial fishing vessel (Sec. 27, R.A. 8550); 12. Corporations engaged in Coastwise shipping (Sec. 806, P.D. 1464)

Private Radio Communications network (R.A. 3846).

75 % Filipino Owned (Up to twenty percent (25%) foreign equity) (Code: LoRD F) 1. Contracts for the construction and repair of LOcally-funded public works (Sec. 1, CA 541, LOI 630) except: 1. infrastructure/development projects covered in R.A. 7718; and 2. projects which are foreign funded or assisted and required to undergo international competitive bidding (Sec. 2[a], R.A. 7718); 2. Private Recruitment, whether for local or overseas employment (Art. 27, P.D. 442); 3. Contracts for the construction of Defense-related structures (Sec. 1, CA 541). 4. Under the Flag Law, in the purchase of articles for the Government, preference shall be given to materials and supplies produced, made, or manufactured in the Philippines, and to domestic entites. Domestic entites means any citizen of the Philippines or commercial company at least 75% of the capital of which is owned by citizens of the Philippines (Sec. 1, CA 138) 70 % Filipino Owned (Up to twenty percent (30%) foreign equity) (Code: AdPawn)

40 % Filipino Owned (Up to twenty percent (60%) foreign equity)

1. Advertising (Art. XVI, Constitution) 2. Corporations engaged in pawnshop business (Sec. 8, P.D. 114)

(Code: FI [SEC] ) 1. Financing companies regulated by the SEC (Sec. 6, R.A. 5980 as amended by R.A. 8556); 2. Investment houses regulated by the SEC (Sec. 5, P.D. 129 as amended by R.A. 8366). UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE Q: Rufina Lim is the surviving spouse of the late Pastor Lim whose estate is the subject of probate proceedings in another case. In the inventory of the estate of Pastor Lim, the properties registered in the names of Auto Truck Corporation, et al., were included. Auto Truck Corporation, et al., thereafter filed a motion for exclusion of certain properties from the estate of Pastor Lim. The Probate Court granted the same. Subsequently, Rufina Lim filed an amended petition which averred that Auto Truck Corporation, et al.,’s capital, assets and equity were personally owned by Pastor Lim and that the alleged stockholders and officers appearing in the AOI of Auto Truck Corporation, et al., were mere dummies of Pastor Y. Lim, and they were listed therein only for purposes of registration with the SEC. Because of this, the Probate Court reversed its earlier order and held that the subject properties should be included in the estate of Pastor Lim. The Probate court held that the corporations were mere alter egos or instrumentalities of Pastor Lim and that the issue involves the piercing of the corporate veil. Are the subject properties registered in the name of Auto Truck Corporation should be included in the estate of Pastor Lim?

CORPORATE JURIDICAL PERSONALITY DOCTRINE OF SEPARATE JURIDICAL PERSONALITY Doctrine of corporate juridical personality The doctrine of corporate juridical personality states that a corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it (Francisco v Mallen Jr. G.R. No. 173169, September 22, 2010). Significance of the doctrine of separate personality 1.

Liability for acts or contracts – As a general rule, the obligation of the corporation is not the liability of the stockholders, officers or directors (Remo vs. IAC, G.R. No. L-67626, April 18, 1989). A corporation may not, generally, be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected, and vice versa (Cease vs. CA, G.R. No. L-33172, Oct. 18, 1979).

2.

Right to bring actions – may bring civil and criminal actions in its own name in the same manner as natural persons (Art. 46, Civil Code).

3.

Right to acquire and possess property – property conveyed to or acquired by the corporation is in law the property of the corporation itself as a distinct legal entity and not that of the stockholders or members (Art. 44[3], Civil Code).

4.

Acquisition of jurisdiction – service of summons may be made on the president, general manager, corporate secretary, treasurer or in-house counsel (Sec. 11, Rule 14, Rules of Court).

5.

Changes in individual membership – corporation remains unchanged and unaffected in its identity by changes in its individual membership or ownership of its stocks.

A: No. The real properties included in the inventory of the estate of the late Pastor Y. Lim are in the possession of and are registered in the name of Auto Truck Corporation, which under the law possesses a personality separate and distinct from its stockholders, and in the absence of any cogency to shred the veil of corporate fiction, the presumption of conclusiveness of said titles in favor of Auto Truck Corporation should stand undisturbed. A corporation is invested by law with a personality distinct and separate from its stockholders or members. In the same vein, a corporation by legal fiction and convenience is an entity shielded by a protective mantle and imbued by law with a character alien to the persons comprising it. Furthermore, mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities (Rufina Luy Lim v. CA, G.R. No. 124715, January 24, 2000).

Stockholders are not entitled to possess the property of the corporation

Q: Indophil Union is a legitimate labor organization and the exclusive bargaining agent of all the rank-and-file employees of Indophil Textile. Indophil Union and Indophil Textile executed a CBA. After some time, Indophil Acrylic was formed. Acrylic became operational and hired workers according to its own criteria and standards. Subsequently, the workers of Acrylic unionized and a duly certified CBA

The interest of the shareholder in the properties of the corporation is inchoate only. The interest of the shareholder on a particular property becomes actual, direct and existing only upon the liquidation of the assets of the corporation and the provided that the same property is assigned to the shareholder concerned.

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MERCANTILE LAW was executed. A year after, Indophil Union claimed that the plant facilities built and set up by Acrylic should be considered as an extension or expansion of the facilities of Indophil Textile and in other words, Acrylic is part of Indophil Textile bargaining unit. On the other hand, Indophil Textile submits that it is a juridical entity separate and distinct from Acrylic and hence Acrylic is not part of its bargaining unit. Are the rank-and-file employees working at Indophil Acrylic a part of, and/or within the scope of the bargaining unit of Indophil Textile?

the rules governing the liability of a principal or master for a tort committed by an agent or servant are the same, whether the servant or agent be a natural or artificial person (ibid). Liability of a corporation in cases of crimes GR: A corporation is not liable in cases of crimes. Since a corporation is a mere creation of legal fiction, it cannot be held liable for a crime committed by its officers, since it does not have the essential element of malice; in such case the responsible officers would be criminally liable (People v. Tan Boon Kong, G.R. No. L-32066. Mar. 15, 1930).

A: No. The rank-and-file employees of Acrylic is not within the scope of the bargaining unit of Indophil Textile. The fact that the businesses of Indophil Textile and Acrylic are related, that some of the employees of Indophil Textile are the same persons manning and providing for auxiliary services to the units of Acrylic, and that the physical plants, offices and facilities are situated in the same compound, are of no moment. These facts are not sufficient to justify the piercing of the corporate veil of Acrylic. It must be emphasized that the legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. In the instant case, Indophil Union does not seek to impose a claim against the members of the Acrylic (Indophil Textile Mill Workers Union-PTGWO, v. Voluntary Arbitrator Teodorico P. Calica, G.R. No. 96490, February 3, 1992).

XPN: If the penalty of the crime is only fine or forfeiture of license or franchise (Ching v Secretary of Justice, G. R. No. 164317, Feb. 6, 2006). RECOVERY OF MORAL DAMAGES Recovery of moral damages GR: A corporation is not entitled to moral damages because it has no feelings, no emotions, no senses (ABS-CBN Broadcasting Corporation v. CA, G.R. No. 128690 Jan 21, 1999 and Phillip Brothers Oceanic, Inc, G.R. No. 126204, Nov. 20, 2001). XPNs: 1. The corporation may recover moral damages under item 7 of Article 2219 of the New Civil Code because said provision expressly authorizes the recovery of moral damages in cases of libel, slander, or any other form of defamation.

Entitlement of corporations to Constitutional rights Corporations are entitled to the following rights under the constitution; 1. Right to Due Process (Sec. 1, Art. III, Constitution). 2. Right against unreasonable searches and seizures (Sec. 2, ibid).

Article 2219(7) does not qualify whether the injured party is a natural or juridical person. Therefore, a corporation, as a juridical person, can validly complain for libel or any other form of defamation and claim for moral damages (Filipinas Broadcasting Network, Inc. v. AMEC-BCCM, G.R. No. 141994, Jan 17, 2005).

However, the corporation is not entitled to the right against self-incrimination, being a mere creature of law. (Bataan Shipyard & Engineering v. PCGG , G.R. No. 75885, May 27, 1987). LIABILITY FOR TORTS AND CRIMES

2. When the corporation has a reputation that is debased, resulting in its humiliation in the business realm (Manila Electric Company v. T.E.A.M. Electronics Corporation, et. al., G.R. No. 131723, Dec. 13, 2007).

A corporation may be held liable for torts The corporation is liable for every tort which it expressly directs or authorizes (PNB v. CA, G.R. No. L-27155, May 18, 1978).

Q: "Exposé" is a radio documentary program hosted by Rima and Alegre. It is aired every morning over DZRC-AM which is owned by FBNI. One morning, Rima and Alegre exposed various alleged complaints from students, teachers and parents against AMEC and its administrators. Claiming that the broadcasts

Reason for liability in cases of torts A corporation is civilly liable in the same manner as natural persons for torts, because generally speaking, UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE were defamatory, AMEC and Ago, as Dean of AMEC’s College of Medicine, filed a complaint for damages against FBNI, Rima and Alegre. The trial court ruled in favor of AMEC and Ago. The CA affirmed. Among others, FBNI claims that AMEC is not entitled to moral damages because it is a corporation. Is AMEC is entitled to moral damages?

not entitled to moral damages because, not being a natural person, it cannot experience physical suffering or sentiments like wounded feelings, serious anxiety, mental anguish and moral shock. The only exception to this rule is when the corporation has a reputation that is debased, resulting in its humiliation in the business realm. But in such a case, it is imperative for the claimant to present proof to justify the award. It is essential to prove the existence of the factual basis of the damage and its causal relation to Meralco’s acts. In the present case, the records are bereft of any evidence that the name or reputation of TEC/TPC has been debased as a result of Meralco’s acts (Manila Electric Company v. T.E.A.M. Electronics Corporation, et al., G.R. No. 131723, December 13, 2007).

A: Yes. AMEC is entitled to moral damages. A juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. Nevertheless, AMEC’s claim for moral damages falls under item 7 of Article 2219 of the Civil Code. This provision expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person such as a corporation can validly complain for libel or any other form of defamation and claim for moral damages (Filipinas Broadcasting Network, Inc., v. AMEC-BCCM, G.R. No. 141994, January 17, 2005). . Q: Meralco and TEC were parties to two separate contracts for the sale of electric energy. Meralco undertook to supply TEC’s building known as DCIM with electric power. One day, Meralco conducted a surprise inspection of the electric meters installed at the DCIM building. Two meters were found to be allegedly tampered with and did not register the actual power consumption in the building. Meralco informed TEC of the results of the inspection and demanded from the latter the payment of its unregistered consumption. TEC failed to pay the same. For failure to pay Meralco disconnected the electricity supply to the DCIM building. TEC demanded from Meralco the reconnection of electrical service, claiming that it had nothing to do with the alleged tampering but the latter refused to heed the demand. The ERB immediately ordered the reconnection of the service but Meralco did not immediately complied. After this, a second and third inspection was conducted by Meralco, and the same yielded to same result as the first inspection. Thus, Meralco demanded payment with a warning of disconnection if TEC will refuse to pay. TEC filed a complaint for damages against Meralco before the RT. The RTC ruled in favor of TEC and it awarded, among others, moral damages. Is TEC entitled to moral damages

DOCTRINE OF PIERCING THE CORPORATE VEIL Doctrine of piercing the corporate veil The doctrine of piercing the corporate veil is the doctrine that allows the State to disregard the notion of separate personality of a corporation for justifiable reason/s. NOTE: This is an exception to the Doctrine of Separate Corporate Entity.

Requirement to justify the piercing of the corporate veil In order to justify the piercing of the corporate veil, allegation or proof of fraud or other public policy considerations is needed (Hacienda Luisita Incorporated vs. Presidential Agrarian Reform Council, G.R. No. 171101, November 22, 2011). Effect of piercing the corporate veil Courts will look at the corporation as an aggregation of persons undertaking the business as a group or two corporations will be treated as identical. NOTE: When the veil of corporate fiction is pierced in proper cases, the corporate character is not necessarily abrogated. It continues for legitimate objectives (Reynoso IV vs. CA, G.R. Nos. 116124‐25, Nov 22, 2000).

GROUNDS FOR APPLICATION OF DOCTRINE Grounds for the application of the doctrine of piercing the corporate veil

A: No. TEC is not entitled to moral damages. TEC’s claim was premised allegedly on the damage to its goodwill and reputation. As a rule, a corporation is

When the veil of corporate fiction is used as a shield: 1. To perpetuate fraud, 2. To defeat public convenience,

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MERCANTILE LAW 3. Justify wrong or 4. Defend crime or 5. For ends subversive of the policy and purpose behind its creation, especially where the corporation is a closed family corporation, on equity considerations, this fiction will be disregarded and the individuals composing it or two corporations will be treated as identical (Sundiang, 2009, citing Cruz vs. Dalisay, AM No. R-181-P, July 31, 1987; De Leon, 2010, citing Yutivo Sons Hardware Co. vs. CTA, 1 SCRA 160 [1961], Emiliano Cano Enterp., Inc. vs. CIR, 13 SCRA 290 [1965].).

not, generally, be made to answer for acts or liabilities of the said corporation, and vice versa. The mere fact that Oñate owned the majority of the shares of ECO is not a ground to conclude that Oñate and ECO is one and the same. Mere ownership by a single stockholder of all or nearly all of the capital stock of a corporation is not by itself sufficient reason for disregarding the fiction of separate corporate personalities. Neither is the fact that the name “ECO” represents the first three letters of Oñate’s name sufficient reason to pierce the veil. Even if it did, it does not mean that the said corporation is merely a dummy of Oñate. A corporation may assume any name provided it is lawful. There is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its shareholders (Land Bank of the Philippines v. CA, et al., G.R. No. 127181, September 4, 2011).

Circumstances which do not warrant the piercing of the corporate veil The mere fact that: 1. A corporation owns 50% of the capital stock of another corporation, or the majority ownership of the stocks of a corporation is not per se a cause for piercing the veil. 2. Two corporations have common directors or same or single stockholder who has all or nearly all of the capital stock of both corporations is not in itself sufficient ground to disregard separate corporate entities. 3. There is a substantial identity of the incorporators of the 2 corporations does not necessarily imply fraud and does not warrant piercing the corporate veil.

Q: X owns 99% of the capital stock of SSS Corporation. X also owns 99% of TTT Corporation. SSS Corporation obtained a loan from VW Bank. On due date, SSS Corporation defaulted. TTT Corporation is financially healthy. Which statement is most accurate? (2012 Bar Question) a.

b. c.

Q: Land Bank of the Philippines (LBP) extended a series of credit accommodations to ECO using the trust funds of PVTA. The proceeds of the credit accommodations were received on behalf of ECO by Emmanuel Oñate. Upon maturity of the loans, ECO failed to pay the same. Despite demands, ECO was unable to pay. ECO then submitted a Plan of Payment to LBP, however, the latter rejected the same. LBP filed a complaint for collection of sum of money against ECO and Oñate. The RTC rendered judgment against ECO and absolved Oñate from personal liability. The CA affirmed. LBP contends that the personalities of Oñate and of ECO should be treated as one, for the particular purpose of holding Oñate liable for the loans incurred by ECO from Land Bank. Is Oñate jointly and severally liable with ECO for the loans incurred from LBP?

d.

A: C. Mere ownership by a single stockholder of all or nearly all of the capital stock of a corporation is not by itself sufficient reason for disregarding the fiction of separate corporate personalities (Land Bank of the Philippines, GR No. 127181, Sept. 4, 2001). Thus, the fact that X owns majority of the shares in both corporations does not automatically arise to one and the same personality or an intertwined ownership of said corporations.

A: No. Oñate should not be held jointly and severally liable with ECO. A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those persons composing it as well as from any other legal entity to which it may be related. By this attribute, a stockholder may UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

X being a controlling owner of SSS Corporation can automatically be held personally liable for the loan of SSS Corporation. TTT Corporation, owned 99% by X, can automatically be held liable. SSS Corporation and TTT Corporation, although both are owned by X, are two (2) distinct corporations with separate juridical personalities hence, the TTT Corporation cannot automatically be held liable for the loan of SSS Corporation. The principle of piercing the veil of corporate fiction can be applied in this case.

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CORPORATION CODE TEST IN DETERMINING APPLICABILITY

Indications that a subsidiary corporation is a mere instrumentality of its parent corporation

Test in determining applicability of the doctrine of piercing the corporate veil

1.

The parent corporation owns all or most of the capital stock of the subsidiary. 2. The parent and subsidiary corporations have common directors or officers. 3. The parent corporation finances the subsidiary. 4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation. 5. The subsidiary has grossly inadequate capital. 6. The parent corporation pays the salaries and other expenses or losses of the subsidiary. 7. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the parent corporation. 8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation, or its business or financial responsibility is referred to as the parent corporation's own. 9. The parent corporation uses the property of the subsidiary as its own. 10. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation. 11. The formal legal requirements of the subsidiary are not observed (PNB vs. Ritratto Group G.R. No. 142616, July 31, 2001).

The following are the tests in determining the applicability of the doctrine of piercing the corporate veil: (ECAO) 1. When the corporation is used to defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; (Equity Cases) 2. In fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; (Control Test) 3. In Alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation (Timoteo H. Sarona vs. National Labor Relations Commission, Royale Security Agency, et al., G.R. No. 185280, January 18, 2012). 4. The Objective test where the end result in piercing the veil of corporate fiction is to make the stockholders liable for debts and obligations of the Corporation not to make the Corporation liable for the debts and obligations of the stockholders (Umali v CA, G.R. No. 89561, Sept. 13, 1990). Piercing the veil of corporate fiction on the basis of equity

Q: PNB-IFL a subsidiary company of PNB, organized and doing business in Hong Kong, extended a letter of credit in favor of Ritratto Group Inc., et al., in the amount of US$300,000.00. However, as their outstanding obligations stood at US$1,497,274.70, and the same remains unpaid, PNB-IFL, through its attorney-in-fact PNB, notified the Ritratto Group Inc., et al., of the foreclosure of all the real estate mortgages and that the properties subject thereof were to be sold at a public auction. Ritratto Group Inc., et al., filed a complaint for injunction against PNB for the latter to be restrained from foreclosing and eventually selling its property. The RTC granted the injunction. It applied the doctrine of Piercing the Veil of Corporate Identity by stating that PNB is merely an alter ego or a business conduit of PNB-IFL. Is PNB is merely an alter ego or business conduit of PNB-IFL?

Equity cases applying the piercing doctrine are what are termed the "dumping ground", where no fraud or alter ego circumstances can be culled by the Court to warrant piercing. The main feature of equity cases is the need to render justice in the situation at hand or to brush aside merely technical defenses. Often, equity cases of piercing appear in combination with other types of piercing (Villanueva, Corporation Law, 2010). Specifically, the equity test can be applied when: 1. The corporate personality would be inconsistent with the business purpose of the legal fiction, or 2. The piercing the corporate fiction is necessary to achieve justice or equity for those who deal in good faith with the corporation, 3. When the use of the separate juridical personality is used to confuse legitimate issues.

A: No. PNB is not an alter ego or business conduit of PNB-IFL. Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no

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MERCANTILE LAW showing of the indicative factors that the former corporation is a mere instrumentality of the latter are present. Neither is there a demonstration that any of the evils sought to be prevented by the doctrine of piercing the corporate veil exists. Inescapably, therefore, the doctrine of piercing the corporate veil based on the alter ego or instrumentality doctrine finds no application in the case at bar. In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship involved in this case since PNB was not sued because it is the parent company of PNB-IFL. Rather, PNB was sued because it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings. A suit against an agent cannot without compelling reasons be considered a suit against the principal. Under the Rules of Court, every action must be prosecuted or defended in the name of the real party-in-interest, unless otherwise authorized by law or these Rules (PNB v. Ritratto Group Inc., et al., G.R. No. 142616, July 31, 2001).

corporate fiction. The latter set up the defense that the agents are in the employ of X Corp. which is a separate juridical entity. Is this defense appropriate? (2011 Bar Question)

Q: Plaintiffs filed a collection action against X Corporation. Upon execution of the court's decision, X Corporation was found to be without assets. Thereafter, plaintiffs filed an action against its present and past stockholder Y Corporation which owned substantially all of the stocks of X corporation. The two corporations have the same board of directors and Y Corporation financed the operations of X corporation. May Y Corporation be held liable for the debts of X Corporation? Why? (2001 Bar Question)

1. 2. 3.

A: Yes, it is not shown that one company completely dominates the finances, policies, and business practices of the other.

INCORPORATION AND ORGANIZATION Incorporation It is the performance of conditions, acts, deeds, and writings by incorporators, and the official acts, certification or records, which give the corporation its existence. Steps in the creation of a corporation

Components of a corporation (DUMP-ISCO) 1. Corporators – Those who compose a corporation, whether as stockholders or members 2. Incorporators – They are those mentioned in the Articles of Incorporation as originally forming and composing the corporation and who are signatories thereof. 3. Directors and trustees – The Board of Directors is the governing body in a stock corporation while the Board of Trustees is the governing body in a non-stock corporation. 4. Corporate Officers – Officers who are identified as such in the Corporation Code, the Articles of Incorporation, or the By-laws of the corporation. 5. Stockholders – Owners of shares of stock in a stock corporation. 6. Members – Corporators of a corporation which has no capital stock. They are not owners of shares of stocks, and their membership depends on terms provided in the articles of incorporation or by-laws (Sec. 91,CC). 7. Promoter – A person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor. (Sec. 3.10, R.A. No. 8799, SRC)

A: Yes. Y Corporation may be held liable for the debts of X Corporation. The doctrine of piercing the veil of corporation fiction applies to this case. The two corporations have the same board of directors and Y Corporation owned substantially all of the stocks of X Corporation, which facts justify the conclusion that the latter is merely an extension of the personality of the former, and that the former controls the policies of the latter. Added to this is the fact that Y Corporation controls the finances of X Corporation which is merely an adjunct, business conduit or alter ego of Y Corporation (CIR v. Norton & Harrison Company, G.R. No. L‐17618, Aug. 31, 1964). Q: X Corp. operates a call center that received orders for pizzas on behalf of Y Corp. which operates a chain of pizza restaurants. The two companies have the same set of corporate officers. After 2 years, X Corp. dismissed its call agents for no apparent reason. The agents filed a collective suit for illegal dismissal against both X Corp. and Y Corp. based on the doctrine of piercing the veil of UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Promotion Incorporation (Sec. 10, CC) Formal organization and commencement of business operations (Sec. 22, CC)

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CORPORATION CODE 8. Subscriber – persons who have agreed to take and pay for original, unissued shares of a corporation formed or to be formed. 9. Underwriter – 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.

Promoter v. Promotee PROMOTER

Kinds of underwriting agreement 1. English – the underwriter sells what the corporation cannot sell 2. Firm Commitment – the underwriter purchases outright the securities and then resells the same 3. Best Efforts – the underwriter merely sells for commission.

PROMOTEE

Involved in the initial steps that finally led to the incorporation

Those who merely subscribe to the shares of stock of a corporation to be formed

Promoters organize a corporation and are active participants in its formation

Merely passive investors

Promoter(s) have joint personal liability for a corporation which was not formed

A mere promotee should not be held liable for a promoter’s liability in a corporation which was not formed

PROMOTER Promoter

Relation of the promoter to the corporation

A 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 therefor (Sec.3.10, SRC).

The promoter occupies a fiduciary or quasi-trust relation toward the corporation when it comes into existence and towards the subscribers prior to its organization, as long as they are acting as promoters (ibid., pg. 122-123). This fiduciary relation imposes upon the promoter to act in good faith in all dealings in behalf of the corporation to protect the corporation from dishonest promoters (ibid).

Specifically, a promoter is a person who brings about or cause to bring about the formation and organization of a corporation by: 1. Bringing together the incorporators or the persons interested in the enterprise, 2. Procuring subscriptions or capital for the corporation and 3. Setting in motion the machinery which leads to the incorporation of the corporation itself.

Promoter is not an agent of the corporation The promoters are not in any sense agents of the corporation before it comes into existence for there cannot be an agency unless there is a principal. But, they may become the agents of the corporation after it has been formed provided there is assent, express or implied, on the part of the corporation (ibid).

Promotional activities Promotional activities includes: (DIA) 1. Discovery – consists of finding a business opportunity to be developed. 2. Investigation – entails an analysis of the proposed business to determine whether or not it is economically feasible. 3. Assembly – Includes the bringing together of the necessary personnel, property or money to set the business in motion as well as secondary details of setting up the corporation itself (De Leon, supra, pg. 122).

Promoter as agent of an incorporator/ corporator/ subscriber before the commencement of the corporate existence Before the corporation is formed, the promoters are considered agents of the subscribers, the incorporators or corporators. NOTE: The subscribers for stock in a proposed corporation do not, without agreement to such effect, become partners with the promoters of it (ibid).

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MERCANTILE LAW Promoter v. Corporation by estoppel PROMOTER No misrepresentation that the corporation does not yet exist

corporation the opportunity to assume and pay the liability (ibid).

CORPORATION BY ESTOPPEL Persons assume to act as a corporation knowing it to be without authority to do so

LIABILITY OF CORPORATION FOR PROMOTER’S CONTRACT Liability of corporation for promoter’s contract GR: Since a corporation cannot, before its organization, have agents contract for itself, or be contracted with, it is not liable upon any contract which a promoter attempts to make for it prior to its organization.

LIABILITY OF PROMOTER Rules governing the liability of promoters in pre-incorporation agreements

XPNs: 1. The contract is expressly or impliedly adopted or ratified by the corporation after its organization is completed or 2. Liability is imposed by statute.

1. If Corporation was never formed - The promoter is liable for his pre-incorporation acts and assumes the risk that he may not be reimbursed or relieved of liability in the event that the corporation is not formed (Wells v. Fay & Egan Co., 143 Ga. 732). If the promoter contracts as an agent, when in fact he has no principal, he will be personally liable (Ibid).

NOTE: Until such assumption of liability is made by the corporation, the better rule is that the contracts entered into by promoters “should at most be deemed suspended, and enforceable only after the incorporation and organization” of the corporation (Ibid).

Thus, GR: The promoter is liable to return the money paid by the subscribers for shares in a projected corporation, which failed to organize. This notwithstanding that the money has been already applied in payment of preliminary expenses or otherwise.

Liability of corporation for promotion fees GR: The corporation is not liable to its promoters for their service fees incurred before incorporation. XPNs: 1. The corporation expressly agrees to make such payment or; 2. From other facts the court can infer a new contract to reimburse (Ibid) or 3. If the same is provided for in the registration statement of securities filed with the SEC (Sec. 8[34], Revised Securities Act).

NOTE: It must be shown by the subscriber that the person receiving the money sought to be recovered was authorized to receive it and the fact that the said person actually received it.

XPN: Where the subscriber agrees that the amount paid on his subscription may be applied on certain promotional or development expenses and it is so applied, the promoters are not personally liable for the amount paid on the subscription (De Leon, 2010).

Stockholders of the corporation cannot be held personally liable for compensation claimed by promoters

2. If Corporation was formed;

Stockholders cannot be held personally liable for the compensation for services performed by promoters in the organization of the corporation in the absence of any showing that said stockholders contracted such services. The fact that they benefited from such services is no justification to hold them personally liable therefore (Ibid., citing Caram, Jr. vs. CA, 151 SCRA 372 [1987]).

GR: If the contract is partly to be performed before incorporation, the promoters solely are liable even if the promoter signed "on behalf of corporation to be formed, who will be obligor" (Stanley J. How & Assoc., Inc. v. Boss, 222 F. Supp. 936,1963 U.S. Dist. 1963). XPN: The promoter may be absolved from liability by the adoption of the corporation of the contract. The adoption must be expressed in a novation or agreement to the effect: 1. That the creditor agreed to look solely to the new corporation for payment; or 2. That the promoter did not have any duty toward the creditor to form the corporation and give the UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE NUMBER AND QUALIFICATIONS OF INCORPORATORS

nationalized where majority must be citizens.

Number and the qualifications of incorporators in a stock corporation (N5L - R1) 1.

2.

3. 4. 5.

NOTE: Non-residents may be incorporators because the law only requires that the majority of incorporators be residents of the Philippines.

GR: Natural person XPN: Under the Rural Banks Act of 1992, incorporated cooperatives are allowed to be incorporators of rural banks.

Q: X is a Filipino immigrant residing in Sacramento, California. Y is a Filipino residing in Quezon City, Philippines. Z is a resident alien residing in Makati City. GGG Corporation is a domestic corporation – 40% owned by foreigners and 60% owned by Filipinos, with T as authorized representative. CCC Corporation is a foreign corporation registered with the Philippine Securities and Exchange Commission. KKK Corporation is a domestic corporation (100%) Filipino owned. S is a Filipino, 16 years of age, and the daughter of Y.

GR: Incorporators must not be less than 5 but not more than 15 XPN: Corporation sole An incorporator must be of Legal age Majority of the incorporators must be Residents of the Philippines. Each must own or subscribe to at least 1 share (Sec.10, CC).

a.) Who can be incorporators? Who can be subscribers? b.) What are the differences between an incorporator and a subscriber, if there are any? (2012 Bar Question)

Corporator v. Incorporator INCORPORATOR Those stockholders or members mentioned in the AOI as originally forming and composing the corporation and who are signatories thereof. A signatory of the AOI

Does not cease to be an incorporator upon sale of his shares

CORPORATOR Those who compose a corporation, whether as stockholders or as members.

A: a.) X, Y, and Z can be incorporators. Sec. 10 of the CC merely requires majority of the incorporators to be residents (not necessarily citizens) of the Philippines. Further, said incorporators must be natural persons, of legal age and must own or subscribe to at least 1 share.

May or may not be signatory of the AOI Ceases to be a corporator by sale of his shares in case of stock corporation.

Meanwhile, X, Y, Z, GGG, CCC, KKK can be subscribers. Residency requirement is immaterial in subscription contracts. However, the citizenship requirement is material in subscription contracts if the corporation is engaged in nationalized activities requiring at least majority Filipino citizenship as a requirement.

In case of non-stock corporation, when the corporator ceases to be a member.

b.) The following are the differences between an incorporator and a subscriber:

GR: 5 to 15 natural persons XPNs: 1. In case of rural banks, registered cooperatives may be incorporators. 2. corporation sole – only 1 incorporator GR: Filipino citizenship is not a requirement. XPN: When engaged in a business which is partly or wholly

INCORPORATORS Those stockholders or members mentioned in the AOI as originally forming and composing the corporation.

GR: No limit XPN: Close corporations

A signatory of the AOI Same rule applies

GR: 5 to 15 natural persons

SUBSCRIBER They are persons who have agreed to take and pay for original, unissued shares of a corporation formed or to be formed. May or may not be signatory of the AOI GR: No limit XPN:

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Close

MERCANTILE LAW XPNs: 1. In case of rural banks, registered cooperatives may be incorporators.

corporations – not more than a specified number of persons, usually not exceeding 20 (Sec. 96, CC)

5.

2. corporation sole – only 1 incorporator GR: Filipino citizenship is not a requirement. XPN: When engaged in a business which is partly or wholly nationalized where majority must be citizens. Majority of the incorporators must be residents of the Philippines.

6.

Same rule applies

Residency requirement is not applicable.

CORPORATE NAME – LIMITATIONS ON USE OF CORPORATE NAME

7.

Q: What is required to be used as a part of the corporate name? A: The word, “corporation” or “incorporated” or an abbreviation of either of them is required to be used as a part of the corporate name. This is to distinguish the corporation from a partnership and other business organizations (SEC Memo. Circ. No. 5, Series of 2008).

8.

NOTE: Priority of adoption determines the right to the exclusive use of a corporate name with freedom from infringement. Further, to determine whether a given corporate name is “identical” or “confusingly or deceptively similar” with another entity’s corporate name, the corporate names must be evaluated in their entirety (Lyceum of the Philippines vs. CA, 219 SCRA 610 [1993]).

Limitations on the use of corporate name 1.

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 (Sec. 18, CC). 2. No corporate name may be allowed by the SEC if the proposed name is identical or deceptively or confusingly similar to any other name already protected by law (Sec. 18, CC). 3. The proposed name is patently deceptive, confusing or contrary to existing laws (Sec. 18, CC). 4. If the name applied for is similar to the name of a registered firm, the applicant shall at least contain one or more distinctive words to the proposed name to remove the similarity or differentiate it from the registered name. However, the addition of these distinctive words shall not be allowed if the registered name is UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

coined or unique unless the board of directors of the subject corporation gives its consent to the applied name (De Leon, 2010, citing SEC Memo, Cir. No. 5, Series of 2008). The corporate name shall contain the word “Corporation” or its abbreviation “Corp.” or “Incorporated”, or “Inc.” The corporate name of a foundation shall use the word “Foundation” (SEC Memo. Circ. No. 5, Series of 2008). A person’s full name or surname may be used in a corporate name: a. If he is a stockholder of the corporation and has consented to such use; b. If the person is already deceased, the consent shall be given by his estate; c. The Commission may require a registrant to explain to its satisfaction the reason for the use of a person’s name; d. The meaning of initials used in a name shall be stated by the registration the articles of incorporation in a separate document signed by an incorporator or director (SEC Memo. Circ. No. 5, Series of 2008). The name of a dissolved firm shall not be allowed to be used by other firms within 3 years after the approval of the dissolution of the corporation by SEC, unless allowed by the last stockholders representing at least majority of the outstanding capital stock of the dissolved firm (SEC Memo. Circ. 14, Series of 2000). For as long as a corporation is existing regardless of whether or not it is in operation, its corporate name cannot be used by any other group or corporation (SEC Opinion, Sept. 2, 1993).

Q: Refractories Corporation of the Philippines (RCP) is a corporation for the purpose of engaging in the business of manufacturing, producing, selling, exporting and otherwise dealing in any and all refractory bricks, its by-products and derivatives. On June 22, 1977, it registered its corporate and business name with the Bureau of Domestic Trade. Industrial Refractories Corporation of the Philippines (IRCP) on the other hand, was incorporated originally under the name Synclaire Manufacturing Corporation. It amended its AOI on August 23, 1985 to change its corporate name to Industrial Refractories Corp. of the Philippines. It is engaged in

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CORPORATION CODE the business of manufacturing all kinds of ceramics and other products, except paints and zincs. Both companies are the only local suppliers of monolithic gunning mix. Discovering that IRCP was using such corporate name, RCP filed with SEC a petition to compel IRCP to change its corporate name on the ground that its corporate name is confusingly similar with that of RCP’s such that the public may be confused or deceived into believing that they are one and the same corporation. Is Industrial Refractories Corporation of the Philippines confusingly similar with Refractories Corporation of the Philippines?

mind of the general public (or at least that portion of the general public to do with the corporation’s market) (Lyceum of the Philippines vs. CA, supra). NOTE: The application of this trademark law doctrine has been extended to corporate names since the right to use a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or trade name (De Leon,2010).

A corporation that changes its corporate name is not considered as a new corporation A corporation that changes its corporate name is not considered as a new corporation. It is the same corporation with a different name, and its character is in no respect changed (Republic Planters Bank v. CA, G.R. No. 93073, Dec 21, 1992).

A: Yes. To fall within the prohibition of the law, two requisites must be proven, to wit: (1) that the complainant corporation acquired a prior right over the use of such corporate name; and (2) the proposed name is either: (a) identical, or (b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary to existing law. In this case, RCP was incorporated on October 13, 1976 and since then has been using the corporate name “Refractories Corp. of the Philippines”. Meanwhile, IRCP was incorporated on August 23, 1979 originally under the name “Synclaire Manufacturing Corporation”. It only started using the name “Industrial Refractories Corp. of the Philippines” when it amended its Articles of Incorporation on August 23, 1985, or nine (9) years after respondent RCP started using its name. Thus, being the prior registrant, respondent RCP has acquired the right to use the word “Refractories” as part of its corporate name (Industrial Refractories Corporation of the Philippines v. CA, et al., G.R. No. 122174, October 3, 2002).

Q: P.C. Javier and Sons Services, Inc., (PC) applied with First Summa Savings and Mortgage Bank, later on renamed as PAIC Savings and Mortgage Bank (The Bank) for a loan accommodation under the Industrial Guarantee Loan Fund (IGLF). Upon maturity, PC failed to pay, hence, the Bank initiated an extrajudicial foreclosure of the real estate mortgage. The instant complaint was filed to forestall the extrajudicial foreclosure sale of a piece of land mortgaged by PC in favor of PAIC Savings and Mortgage Bank, Inc. PC argues that they are legally justified to withhold their amortized payments to the bank until such time they would have been properly notified of the change in the corporate name. They claim that they have never received any formal notice of the alleged change of corporate name of First Summa Savings and Mortgage Bank to PAIC Savings & Mortgage Bank, Inc. Is the Bank required to notify PC Javier & Sons, Inc., of the change in its corporate name?

Doctrine of Secondary Meaning

A: No. The bank is not required to notify PC of its change of name. After going over the Corporation Code and Banking Laws, as well as the regulations and circulars of both the SEC and the Bangko Sentral ng Pilipinas (BSP), the Supreme Court found that there is no such requirement. This being the case, the Court cannot impose on a bank that changes its corporate name to notify a debtor of such change absent any law, circular or regulation requiring it. Such act would be judicial legislation. The formal notification is, therefore, discretionary on the bank. Unless there is a law, regulation or circular from the SEC or BSP requiring the formal notification of all debtors of banks of any change in corporate name, such notification remains to be a mere internal policy that banks may or may not adopt. A change in the corporate name does not make a new corporation,

It is the doctrine which states that 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 (Philippine Nut Industry, Inc. vs. Standard Brands. Inc. 6 SCRA 575 [1975]). The doctrine of secondary meaning requires that the word or phrase used in the corporate name has been for such length of time with such exclusivity as to have associated or identified the corporation in the

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MERCANTILE LAW whether effected by a special act or under a general law. It has no effect on the identity of the corporation, or on its property, rights, or liabilities. The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation. It is the same corporation with a different name, and its character is in no respect changed (P.C. Javier & Sons, Inc., v. CA et al., G.R. No. 129552, June 29, 2005).

d.

The stockholders must pass a resolution to dissolve the corporation.

A: A. The corporation ceases to exist and is dissolved ipso facto upon the expiration of the period fixed in the original AOI, in the absence of compliance with the legal requisites of extension of period (PNB vs. CFI of Rizal, 209 SCRA 294 [1992]). MINIMUM CAPITAL STOCK AND SUBSCRIPTION REQUIREMENTS

CORPORATE TERM Term of corporate existence

Capital stock requirements

GR: The period stated in the AOI which in no case shall exceed 50 years.

GR: There is no minimum authorized capital stock as long as the paid-up capital is not less than P5,000.00.

XPN: Unless sooner dissolved or unless said period is extended (Sec. 11, CC).

XPN: As provided by special law. Minimum stock subscription and paid-up capital requirements

NOTE: Extension may be made for periods not exceeding 50 years in any single instance by an amendment of the articles of incorporation. However, extension must be made within 5 years before the expiry date of the corporate term, unless there are justifiable reasons for an earlier extension as may be determined by the SEC (Sec. 11, CC).

At least 25% of the authorized capital stock as stated in the AOI must be subscribed at the time of incorporation, and at least 25% of the total subscription must be paid upon subscription (Sec 13, CC).

Extension must also comply with procedural requirements for amendment of AOI.

Doctrine of Relation or Relating Back Doctrine

Each subscriber is not required to pay 25% of each subscribed share

GR: 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.

It is not required that each subscriber pay 25% of each subscribed share. It is only required that at least 25% of the total subscribed capital must be paid. Paid-up capital

XPNs: The doctrine of relation applies if the failure to file the application for extension within the term of the corporation is due to: 1. The neglect of the SEC officer with whom the certificate is required to be filed; or 2. A wrongful refusal on his part to receive it (Aquino, Philippine Corporate Law Compendium, 2006).

Paid-up capital forms part of the authorized capital stock of the corporation, subscribed and then actually paid for. The assets transferred and the loans extended to a corporation should not be considered in computing the paid-up capital of the corporation (MISCI-NACUSIP Local Chapter v. National Wages and Productivity Commission 269 SCRA 173).

Q: The term GGG Corporation in accordance with its Articles of Incorporation ended last January 30, 2012. The term was not extended. What will happen to the corporation? (2012 Bar) a. b. c.

Time when the unpaid subscription is payable The balance or the unpaid subscription shall be payable: 1. On a date or dates fixed in the contract of subscription without need of call;, or 2. In the absence of a fixed date or dates, upon call for payment by the BOD (Sec. 13, CC).

The corporation is dissolved ipso facto. There is a need to pass a board resolution to formally dissolve the corporation. The Board of Directors must pass a resolution for the corporation to formally go into liquidation.

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CORPORATION CODE ARTICLES OF INCORPORATION (AOI)

10. If Non-stock, the amount of capital, the names, residences, and amount paid by each contributor, which shall not be less than 25% of total subscription; name of treasurer elected by subscribers; and 11. Other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient (Sec. 14, CC).

NATURE AND FUNCTION OF ARTICLES Articles of Incorporation The Articles of Incorporation (AOI) is one that defines the charter of the corporation and the contractual relationships between the State and the corporation, the stockholders and the State, and between the corporation and its stockholders (Government of the Philippine Islands vs. Manila Railroad Co., 52 Phil. 699 [1929]).

Incorporator may delegate the signing of the AOI An incorporator may delegate to an attorney-in-fact the signing of the AOI in a special power of attorney to such effect. However, the acknowledgment required under Sec. 15 of the CC must reflect this fact (De Leon, 2010, citing SEC Opinion, Dec. 26, 1972).

Three-fold nature of AOI An AOI, which stands as the corporate charter is a contract of three-fold nature because it is a contract between: 1. The State and the corporation; 2. The corporation and the stockholders; and 3. The stockholders inter se.

Reason for the statement of the purpose clause in the AOI The purpose clause determines whether the acts performed by the corporation are authorized or beyond its powers. Acts beyond the corporation’s powers are called ultra vires acts.

CONTENTS Contents of AOI

Rules in the statement of the purpose clause

All corporations organized under the Code shall file with the SEC an AOI in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by the Code or by special law: (NaP- PlaTINum-ASONO) 1. NAme of corporation 2. Purpose/s, indicating the primary and secondary purposes (Purpose Clause) 3. PLAce of principal office 4. Term of existence 5. Names, nationalities and residences of Incorporators 6. NUMber of directors or trustees, which shall not be less than 5 nor more than 15, except for corporation sole 7. Names, nationalities, and residences of the persons who shall Act as directors or trustees until the first regular ones are elected and qualified 8. If a Stock corporation, the amount of its authorized capital stock, number of shares and in case the shares are par value shares, the par value of each share; 9. Names, nationalities, number of shares, and the amounts subscribed and paid by each of the Original subscribers which shall not be less than 25% of authorized capital stock;

1. If there is more than one stated purpose, specify which is the main or primary purpose and which is or are the secondary or subsidiary purpose/s (Sec. 14[2], CC). NOTE: This specification is important in the application of the prohibition under Sec. 42 of the CC which states that the corporation is prohibited from investing corporate funds “for any purpose other than the primary purpose for which it was organized” unless such investment is approved by both majority of the BOD or BOT 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 a non-stock corporation.

2. The purposes must be capable of being lawfully combined. 3. A non-stock corporation may not include a purpose which would change or contradict its nature as such (ibid). Requirements of the SEC as regards the address specification of the corporation in the AOI SEC requires that the applicant corporation must state in its AOI the 1. Specific address of their principal office, which shall include, if feasible, the street name, barangay, city or municipality; and

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MERCANTILE LAW 2. Specific residence address of each incorporator, stockholder, director, trustee, or partner.

in the AOI. Such articles, as amended, shall be indicated by underscoring the change/s made; 5. Certification under oath by corporate secretary and a majority of the BOD/BOT stating the fact that said amendment/s have been duly approved by the required vote of the stockholders or members, shall be submitted to the SEC; 6. Must be approved by SEC (Sec. 16, CC); 7. Must be accompanied by a favorable recommendation of the appropriate government agency in cases of: a. Banks b. Banking and quasi-banking institutions c. Building and loan associations d. Trust companies and other financial intermediaries e. Insurance companies f. Public utilities g. Educational institutions h. Other corporations governed by special laws (Sec. 17 [2], CC)

NOTE: SEC likewise prohibits the use of “Metro Manila” as address of the principal office.

Residence of the corporation The corporation is “in a metaphysical sense a resident of the place where its principal office is located as stated in the AOI” (Golden Arches Dev’t Corp. vs. St. Francis Square Holdings, Inc., GR 183843, January 19, 2011). This ruling regarding the residence of the corporation holds true even though the corporation has closed its office therein and relocated to another place (Hyatt Elevators and Escalators Corp. vs. Goldstar Elevators Phils., Inc., GR 161026, Oct. 24, 2005). Duty of the SEC to file the AOI and to issue a certificate of incorporation GR: The duty of the SEC to file the AOI and to issue a certificate of incorporation is ministerial provided that the AOI substantially comply with the statute. The SEC’s discretion can only be exercised on matters of form and does not extend to the merits of an application for incorporation (Asuncion vs. De Yriarte, GR No. 9321, Sept. 24, 1914).

Time when the amendment of the AOI takes effect The amendment of the AOI takes effect either: 1. Upon approval by the SEC, that is, upon issuance of amended certificate of incorporation or 2. From the date of filing with the SEC: a. If not acted upon within 6 months from the date of filing; and b. For a cause not attributable to the corporation.

NOTE: If the SEC refuses to file the AOI, which substantially complied with the statute, the remedy of the applicant is to file a petition for mandamus (ibid).

XPN: However, SEC has authority to pass upon the lawfulness of the object or purpose of the corporation as expressed in the AOI. Such determination is an exercise of judgment, that is, judicial function on a question of law (ibid).

NOTE: The provision on automatic approval in Sec. 16 does not apply to the dissolution of the corporations in the light of Sec. 120, CC (SEC Opinion, Mar. 30, 1982).

NON-AMENDABLE ITEMS

NOTE: If the SEC errs in the determination of the lawfulness of the purpose of the corporation stated in the AOI and refuses to file the said AOI, its decision is subject to review and correction by the court (ibid).

Non-amendable items in the AOI Those matters referring to accomplished facts, except to correct mistakes.

AMENDMENT

E.g. 1. Names of incorporators 2. Names of original subscribers to the capital stock of the corporation and their subscribed and paid up capital 3. Names of the original directors 4. Treasurer elected by the original subscribers 5. Members who contributed to the initial capital of the non‐stock corporation 6. Witnesses to and acknowledgment with AOI

Limitations in the amendment of AOI 1. The amendment must be for legitimate purposes and must not be contrary to other provisions of the CC and special laws; 2. Approved by majority of BOD/BOT; 3. Vote or written assent of stockholders representing 2/3 of the outstanding capital stock or 2/3 of members; 4. The original and amended articles together shall contain all provisions required by law to be set out UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE Grounds for the rejection or disapproval of the AOI or amendment thereto 1. 2.

3. 4.

Suspension or revocation of the certificate of registration due to failure to operate or continuous inoperation is not automatic

If such is not substantially in accordance with the form prescribed by the CC; The purpose/s of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations; The treasurer’s affidavit concerning the amount of capital stock subscribed and/or paid is false; The required percentage of ownership of the capital stock to be owned by Filipino citizens has not been complied with (Sec. 17, CC).

Under PD No. 902-A, SEC should afford due process or proper notice and hearing before the suspension or revocation of certificate of registration. The suspension or revocation of the certificate of registration due to failure to operate or continuous inoperation is not automatic. REGISTRATION AND ISSUANCE OF CERTIFICATE OF INCORPORATION

NOTE: The above grounds are not exclusive. The grounds according to PD No. 902‐A are: 1. Fraud in procuring its certificate of incorporation; 2. Serious misrepresentation as to what the corporation can do or its doing to the great prejudice of, or damage to, the general public; 3. Refusal to comply with, or defiance or a lawful order of the SEC restraining the commission of acts which would amount to a grave violation of its franchise; 4. Continuous inoperation for a period of at least five (5) years after commencing the transaction of its business (Sec. 22, CC.); 5. Failure to file the by‐laws within the required period; 6. Failure to file required reports.

Basic requirements for the registration and issuance of a certificate of incorporation of a stock corporation

No automatic rejection of the AOI or any amendment thereto

4. Registration data sheet; 5. Proof of payment of subscription like Bank Certificate of Deposit if the paid-up capital is in cash; 6. Favorable endorsement from proper government agency in case of special corporations; and 7. Undertaking of incorporators or directors to change corporate name.

1. Name verification slip; 2. AOI and by-laws; 3. Treasurer’s affidavit; NOTE: Content of a treasurer’s affidavit 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 in actual cash and/or property; such paid-up capital being not less than P5,000 (Sec. 14, 15, CC).

There is no automatic rejection of the AOI or any amendment thereto. The SEC shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the AOI or amendment (Sec. 17[1], CC).

Doctrine of corporate entity

Effect of non-use of corporate charter and continuous inoperation of a corporation

GR: A corporation comes into existence upon the issuance of the certificate of incorporation. Then and only then will it acquire a juridical personality.

1. Failure to organize and commence business within 2 years from incorporation – its corporate powers ceases and the corporation shall be deemed dissolved. 2. Continuous inoperation for at least 5 years – ground for the suspension or revocation of corporate franchise or certificate of incorporation (Sec. 22, CC).

XPN: In case of a corporation sole, the corporation sole commences existence upon the filing of the articles of incorporation. ADOPTION OF BY-LAWS By-laws

NOTE: The above shall not be applicable if it is due to causes beyond the control of the corporation as determined by SEC.

By-laws are rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and of its stockholders or members and directors and officers in

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MERCANTILE LAW relation thereto and among themselves in their relation to it (Valley Golf & Country Club, Inc. vs. Vda. De Caram, GR 158805, April 16, 2009).

BINDING EFFECTS Contents of by-laws

NATURE AND FUNCTIONS OF BY-LAWS

1.

Nature and functions of by-laws 2. The corporate power to adopt by-laws is inherent in every corporation. However, to give emphasis to such necessary corporate incident, said power is expressed in Sec. 36(5) and Sec. 46 of the CC.

3. 4.

The by-laws supplement the AOI. The function of by-laws is to define the rights and duties of corporate officers and directors or trustees, and of stockholders or members towards the corporation and among themselves with reference to the management of corporate affairs and to regulate transaction of the business of the corporation in a particular way (De Leon, 2010).

5. 6.

7.

A corporation sole is not governed by by-laws

8. 9.

A corporation sole is not govered by by-laws. It is instead governed by Rules, Regulations and Discipline of its religious denomination which already contain the provisions embodied in the by-laws of ordinary corporations.

10.

Time, place and manner of calling and conducting regular or special meetings of directors or trustees Time and manner of calling and conducting regular or special meetings of the stockholder or members The required quorum in meeting of stockholders or members and the manner of voting therein The form for proxies of stockholders and members and the manner of voting them The qualification, duties and compensation of directors or trustees, officers and employees Time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof Manner of election or appointment and the term of office of all officers other than directors or trustees Penalties for violation of the by-laws In case of stock corporations, the manner of issuing certificates Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs (Sec. 47, CC).

Procedures in adopting by-laws REQUISITES OF VALID BY-LAWS The by-laws may be adopted before or after incorporation. In all cases, the By-laws shall be effective only upon the issuance by the SEC of a certification that the by-laws are not inconsistent with the AOI. 1. Pre - incorporation – It shall be approved and signed by all the incorporators and submitted to the SEC, together with AOI. 2. Post – incorporation a. Vote of the majority of the stockholders representing the outstanding capital stock or members; b. By-laws shall be signed by the stockholders or members voting for them c. It shall be kept in the principal office of the corporation and subject to the inspection of the stockholders ore members during office hours d. Copy thereof, duly certified by the BOD or BOT countersigned by the secretary of the corporation, shall be filed with the SEC and shall be attached with the original AOI (Sec. 46, CC).

Requisite of valid by-laws The following are the requisites for the validity of by-laws: (CoMorO-RAG) 1. Must be consistent with the COrporation Code, other pertinent laws and regulations 2. Must not be contrary to MORals and public policy 3. Must not impair Obligations and contracts or property rights of stockholders 4. Must be Reasonable 5. Must be consistent with the charter or AOI 6. Must be of General application and not directed against a particular individual. Rule in case of conflict between the by-laws and the AOI In case of conflict between the by-laws and the AOI, the AOI prevails because the by-laws are intended merely to supplement the former.

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CORPORATION CODE Binding effects of by-laws

Effect of non-filing of the by-laws within the required period

The following are the binding effects of by-laws: 1. As to members/ stockholders, officers, trustees/ directors and corporation – They are bound by and must comply them. They are presumed to know the provisions of the by-laws. 2. As to third persons – 3rd persons are not bound unless they have knowledge of by-laws. (PMI College vs. NLRC, 277 SCRA 462, [1997]).

Failure to submit the by-laws within 30 days from incorporation does not automatically dissolve the corporation. It is merely a ground for suspension or revocation of its charter after proper notice and hearing. The corporation is, at the very least, a de facto corporation whose existence may not be collaterally attacked (Sawadjaan v. CA, G.R. No. 142284, June 8, 2005).

NOTE: By-laws have no extra-corporate force and are not in the nature of legislative enactments so far as third persons are concerned.

Articles of incorporation v. By-laws AOI

Q: PMI Colleges (PMI) an educational institution offering courses on basic seaman’s training and other marine-related courses, hired Alejandro Galvan as contractual instructor. Pursuant to this engagement, Galvan then organized classes in marine engineering. Initially, Galvan and other instructors were compensated for services rendered during the first three periods of the abovementioned contract. However, for reasons unknown, Galvan stopped receiving payment for the succeeding rendition of services. Despite repeated demands, PMI failed to pay and hence, Galvan filed a complaint seeking payment for salaries earned. In the proceedings, PMI manifested that Mr. Tomas G. Cloma, Jr., a member of the PMI’s Board of Trustees wrote a letter to the Chairman of the Board clarifying the case of Galvan and stating therein, inter alia, that under PMI’s by-laws only the Chairman is authorized to sign any contract. Hence, according to PMI, the employment contract which was not signed by the Chairman is not binding upon PMI. Is the employment contract is invalid because it violated PMI’s by-laws stating that the Chairman of the BOD should be the signatory thereon?

Condition precedent in the acquisition of corporate existence Essentially a contract between the corporation and the stockholders/ members; between the stockholders/ member inter se, and between the corporation and the State;

A: No. The employment contract is not invalidated by the failure of the Chairman to sign such. Since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the same. No proof appears on record that Galvan ever knew anything about the provisions of said by-laws. In fact, PMI itself merely asserts the same without even bothering to attach a copy or excerpt thereof to show that there is such a provision (PMI Colleges v. NLRC, et al., G.R. No. 121466, August 15, 1997).

BY-LAWS Condition subsequent; its absence merely furnishes a ground for the revocation of the franchise For the internal government artiof the corporation but has the force of a contract between the corporation and the stockholders/ members, and between the stockholders and members;

Executed before incorporation

May be executed after incorporation. Sec. 46 allows the filing of the by-laws simultaneously with the Articles of Incorporation

Amended by a majority of the directors/ trustees and stockholders representing 2/3 of the outstanding capital stock, or 2/3 of the members in case of non-stock corporations

May be amended by a majority vote of the BOD and majority vote of outstanding capital stock or a majority of the member in non-stock corporation

AMENDMENT OR REVISION Ways of amending, repealing or adopting new by-laws 1. Amendment may be made by stockholders together with the Board – by majority vote of directors and owners of at least a majority of the outstanding capital stock/members; or

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MERCANTILE LAW 2. By the board only after due delegation by the stockholders owning 2/3 of the outstanding capital stock/members. Provided, that such power delegated to the board shall be considered as revoked whenever stockholders owning at least majority of the outstanding capital stock or members, shall vote at a regular or special meeting (Sec. 48, CC).

ends in a substantial and not in a remote and fanciful sense, it may be fairly considered within the corporation's charter powers. The rule is that a corporation is not restricted to the exercise of powers expressly conferred upon it by its charter, but has the power to do what is reasonably necessary or proper to promote the interest or welfare of the corporation. The stevedoring services which involve the unloading of the coal shipments into the NPC pier for its eventual conveyance to the power plant are incidental and indispensable to the operation of the plant (National Power Corporation, v. Honorable Abraham P. Vera, et al., G.R. No. 83558, February 17, 1989).

CORPORATE POWERS Powers of corporation 1. Express powers – granted by law, Corporation Code, and its Articles of Incorporation or Charter, and administrative regulations; 2. Inherent/incidental powers – not expressly stated but are deemed to be within the capacity of corporate entities; 3. Implied/necessary powers – exists as a necessary consequence of the exercise of the express powers of the corporation or the pursuit of its purposes as provided for in the Charter

Exercise of corporate powers The Corporation Code of the Philippines vests in the board of directors the exercise of the corporate powers of the corporation, save in those instances where the Code requires stockholders’ approval for certain specific acts (Great Asian Sales Center Corporation v CA, G.R. No. 105774, April 25, 2002).

Q: Sea Lion International Port Terminal Services, Inc. Filed a complaint for prohibition and mandamus against NPC and Philippine Ports Authority (PPA), wherein Sea Lion alleged that NPC had acted in bad faith and with grave abuse of discretion in not renewing its contract for stevedoring services for coal-handling operations at NPC's plant, and in taking over its stevedoring services. The RTC ruled in favor of Sea Lion. National Power Corporation (NPC), seeks to annul the order of the RTC in issuing a writ of preliminary injunction which enjoined NPC from further undertaking stevedoring and arrastre services in its pier and directing it either to enter into a contract for stevedoring and arrastre services or to conduct a public bidding therefor. Does NPC have the power to undertake stevedoring and arrastre services in its pier?

Q: Eliodoro C. Cruz was the former president of Filport. During the general stockholders’ meeting, he wrote a letter to the corporation’s Board of Directors questioning the board’s creation of certain positions with their corresponding monthly renumeration. Because his letter was not heeded favorably, Cruz, purportedly in representation of Filport and its stockholders, among which is Mindanao Terminal and Brokerage Services, Inc. (Minterbro), filed with SEC a petition which he describes as a derivative suit against the the incumbent members of Filport’s Board of Directors, for alleged acts of mismanagement detrimental to the interest of the corporation and its shareholders at large. Did Filport’s Board of Directors act within its powers in creating the executive committee and the positions of AVPs for Corporate Planning, Operations, Finance and Administration, and those of the Special Assistants to the President and the Board Chairman, each with corresponding remuneration?

A: Yes. NPC has the power to undertake stevedoring and arrastre services. To carry out the national policy of total electrification of the country, the NPC was created and empowered not only to construct, operate and maintain power plants, reservoirs, transmission lines, and other works, but also to exercise such powers and do such things as may be reasonably necessary to carry out the business and purposes for which it was organized, or which, from time to time, may be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish said purpose. If that act is one which is lawful in itself and not otherwise prohibited, and is done for the purpose of serving corporate ends, and reasonably contributes to the promotion of those UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

A: Yes. The governing body of a corporation is its board of directors. Section 23 of the Corporation Code explicitly provides that unless otherwise provided therein, the corporate powers of all corporations formed under the Code shall be exercised, all business conducted and all property of the corporation shall be controlled and held by a board of directors. Thus, with the exception only of some powers expressly granted by law to stockholders (or members, in case of non-stock

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CORPORATION CODE corporations), the board of directors (or trustees, in case of non-stock corporations) has the sole authority to determine policies, enter into contracts, and conduct the ordinary business of the corporation within the scope of its charter, i.e., its articles of incorporation, by-laws and relevant provisions of law. Verily, the authority of the board of directors is restricted to the management of the regular business affairs of the corporation, unless more extensive power is expressly conferred. In the present case, the board’s creation of the subject positions was in accordance with the regular business operations of Filport as it is authorized to do so by the corporation’s by-laws, pursuant to the Corporation Code. (Filipinas Port Services, Inc., v. Victoriano S. Go, et al., G.R. No. 161886, March 16, 2007).

b. Candidate and c. Partisan political activity. 10. To establish pension, Retirement, and other plans for the benefit of its directors, trustees, officers and employees – basis of which is the Labor code 11. To exercise Other powers essential or necessary to carry out its purposes. Commencement of the power to sue and be sued The power to sue and be sued commences upon issuance by SEC of Certificate of Incorporation. Limitations of the corporation in dealing with property 1. In dealing with any kind of property, it must be in the furtherance of the purpose for which the corporation was organized. 2. Constitutional limitations – cannot acquire public lands except by lease.

Three levels of control in the corporate hierarchy 1. The board of directors, which is responsible for corporate policies and the general management of the business affairs of the corporation; 2. The officers of the corporation, who in theory execute the policies laid down by the board, but in practice often have wide latitude in determining the course of business operations; 3. The stockholders who have the residual power over fundamental corporate changes, like amendments of the articles of incorporation (City Bank NA vs. Chua, G.R. No. 102300, March 17, 1993).

With regard to private land, 60% of the corporation must be owned by the Filipinos, same with the acquisition of a condominium unit. NOTE: No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land (JG Summit Holdings, Inc. vs. CA, G.R. No. 124293, Jan. 31, 2005).

3. Special law – subject to the provisions of the Bulk Sales Law and law against monopoly, illegal combination or restraint of trade.

GENERAL POWERS, THEORY OF GENERAL CAPACITY Theory of General Capacity

Requisites for a valid donation (RPAI)

The general powers of a corporation also called Theory of General Capacity are the following: (SuSuCo-ABS-PEDRO)

1. Donation must be Reasonable 2. Must be for valid Purposes including public welfare, hospital, charitable, cultural, scientific, civic or similar purposes 3. Must not be an Aid in any a. Political party, b. Candidate and c. Partisan political activity 4. Donation must bear a reasonable relation to the corporation’s Interest and not be so remote and fanciful.

1. To SUe and be sued 2. Of Succession 3. To adopt and use of COrporate seal 4. To amend its Articles of Incorporation 5. To adopt its By-laws 6. For Stock corporations: issue and sell stocks to subscribers and treasury stocks; for non-stock corporations: admit members 7. To Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and personal property, securities and bonds; 8. To Enter into merger or consolidation 9. To make reasonable Donations for public welfare, hospital, charitable, cultural, scientific, civic or similar purposes, provided that no donation is given to any a. Political party,

Corporation as surety or guarantor GR: A corporation cannot act as a surety or guarantor. Acting as a surety or guarantor will be contrary to the primary purpose for which the corporation was created.

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MERCANTILE LAW XPN: Such guaranty may be given in the accomplishment of any object for which the corporation was created, or when the particular transaction is reasonably necessary or proper in the conduct of its business.

POWER TO EXTEND OR SHORTEN CORPORATE TERM Procedural requirements in extending/shortening corporate term

SPECIFIC POWERS, THEORY OF SPECIFIC CAPACITY

1. Majority vote of the BOD or BOT; 2. Ratification by 2/3 of the SH representing outstanding capital stock or by at least 2/3 of the members in case of non-stock corporation; 3. 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; 4. Copy of the amended AOI shall be submitted to the SEC for its approval; and 5. In case of special corporation, a favorable recommendation of appropriate government agency (Sec. 37, CC). 6. The extension must be done during the lifetime of the corporation not earlier than 5 years prior to the expiry date unless exempted. The extension must not exceed 50 years (Sec 16, CC).

Theory of Specific Capacity The specific powers of a corporation also called Theory of Specific Capacity are the following: (ESB-PA-SIDE-A) 1. Power to Extend or shorten corporate term (Sec. 37, CC). 2. Increase or decrease corporate Stock (Sec. 38, CC). 3. Incur, create, or increase Bonded indebtedness (Sec. 38, CC). 4. Deny Pre-emptive right (Sec. 39, CC). 5. Sell, dispose, lease, encumber all or substantially all of corporate Assets (Sec. 40, CC). 6. Purchase or acquire Shares (Sec. 41, CC). 7. Invest corporate funds in another corporation or business for other purpose other than primary purpose (Sec. 42, CC). 8. Declare Dividends out of unrestricted retained earnings (Sec. 43, CC). 9. Enter into management contract with another corporation (not with an individual or a partnership – within general powers) whereby one corporation undertakes to manage all or substantially all of the business of the other corporation for a period not longer than five (5) years for any one term (Sec. 44, CC). 10. Amend Articles of Incorporation (Sec. 16, CC).

NOTE: After the term had expired without extension, the corporation is deemed ipso facto dissolved. The remedy of the stockholders is reincorporation. Any dissenting stockholder may exercise his appraisal right in case of shortening or extending corporate term (Sec. 37, CC).

Q: T Corp. has a corporate term of 20 years under its Articles of Incorporation or from June 1, 1980 to June 1, 2000. On June 1, 1991 it amended its Articles of Incorporation to extend its life by 15 years from June 1, 1980 to June 1, 2015. On June 1, 2011, however, T Corp decided to shorten its term by 1 year or until June 1, 2014. Both the 1991 and 2011 amendments were approved by majority vote of its Board of Directors and ratified in a special meeting by its stockholders representing at least 2/3 of its outstanding capital stock. The SEC, however, disapproved the 2011 amendment on the ground that it cannot be made earlier than 5 years prior to the expiration date of the corporate term, which is June 1, 2014. Is this SEC disapproval correct? (2011 Bar Question)

Corporate powers which are exercised by the BOD and stockholders jointly (ASIA-IDEA- MC) 1. Amendments to by-laws 2. Extending or Shortening the corporate term 3. Increase or decrease of capital stock 4. The sale or other disposition of All or substantially all of the corporate assets 5. Investment of corporate funds in another corporation or business or for any other purpose 6. Issuance of stock Dividends 7. Entering into management contract 8. Amendment to Articles of incorporation 9. Merger or consolidation 10. Grant of Compensation to directors

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

A: No, since the 5-year rule on amendment of corporate term applies only to extension, not to shortening, of term.

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CORPORATION CODE POWER TO INCREASE OR DECREASE CAPITAL STOCK OR INCUR, CREATE, INCREASE BONDED INDEBTEDNESS

either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to 25% of the subscription.

Procedural requirements in increasing or decreasing capital stock

NOTE: A corporation is not prohibited from increasing its authorized capital stock even if the same has not yet been fully subscribed. Once an increase in authorized capital stock is effected, it may be necessarily accompanied by an actual increase in the assets and additional subscriptions in order to comply with the 25% subscription requirement. However, if such increase is for the purpose of effecting a stock dividend previously authorized, then additional subscriptions are NOT urgent.

1. Majority vote of the BOD; 2. Ratification by stockholders representing 2/3 of the outstanding capital stock; 3. Written notice of the proposed increase or diminution of the capital stock and of the time and place of the stockholder’s meeting at which the proposed increase or diminution of the capital stock 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; 4. A certificate in duplicate must be signed by a majority vote of the directors of the corporation and countersigned by the chairman and the secretary of the stockholder’s meeting, setting forth: a. That the foregoing requirements have been complied with; b. The amount of increase or diminution of the capital stock; c. If an increase of the capital stock, the amount of capital stock or number of shares of no par stock actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no par stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend authorized; d. The amount of stock represented at the meeting; and e. The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness.

Reason: The actual capital is increased by accumulated profits and such profits are distributed to the stockholders in the form of stock dividends, the capital stock is increased, for the profits are reinvested in the corporation by transferring the same from surplus account to a capital account. The amount corresponding to the stock dividends declared may be used to cover the required 25% subscription to increase the authorized capital stock and, if sufficient, will obviate the necessity of taking in new subscription (De Leon, supra, pg. 350).

Basis of the required 25% subscription The 25% subscription shall be based on the additional amount by which the capital stock increased and not on the total capital stock as increased. NOTE: Treasurer’s affidavit is required in increasing capital stock, NOT in decreasing capital stock.

Additional requirement with respect to the decrease of capital stock In case of decrease in capital stock, the same must not prejudice the right of the creditors. Ways of increasing or decreasing the capital stock By increasing or decreasing the: 1. Number of shares and retaining the par value; 2. Par value of existing shares and retaining the number of shares; 3. Number of shares and increasing or decreasing the par value.

NOTE: The increase or decrease in the capital stock or the incurring, creating or increasing bonded indebtedness shall require prior approval of the SEC.

NOTE: In decreasing the capital stock, resorting to reduction of number of shares may also be done through: 1. Redeeming redeemable shares (Sec. 8,CC); or 2. purchasing of own shares(Sec. 41,CC); or 3. Cancelling or retiring the shares, including the treasury shares (Sec. 9,CC); or 4. The corporation may accept a surrender of shares and give the holders in exchange therefor a proportionate amount of its assets, provided no rights of creditors are involved; or

Additional requirement with respect to increase of capital stock The application to be filed with the SEC shall be accompanied by the sworn statement of the treasurer of the corporation, showing that at least 25% of the increase in the capital stock was subscribed and 25% of the said amount has been paid

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MERCANTILE LAW 5. Issue bonds for that purpose or 6. Exchange another class of stock for that retired; or 7. Exchange the corporation’s outstanding shares for a smaller number of shares; or 8. Cancelling shares which have not yet been issued (De Leon, supra, pg. 355-356).

2. Subscribers for or purchasers of such stock acquire none of the rights of stockholders; 3. Subscribers for or purchasers of such shares do not become liable to creditors of the corporation or on a winding up as stockholders for unpaid subscriptions, and are not subject to a statutory liability to creditors imposed upon stockholders; and 4. Subscribers for or purchasers of such shares from the corporation may recover from it money paid to it under their subscription or purchase as upon a failure of consideration, or breach of warranty fo the existence of the thing sold, unless they are precluded from such relief as parties in pari delicto (ibid, pg. 351-352).

Q: Can there be a distribution of surplus on reduction? A: It depends whether there is an impairment of capital. 1. If there is no impairment of capital, the surplus may be equitably distributed by the directors or so much thereof as may not be required in carrying on the business for the best interests of the stockholders: Provided the rights of creditors will not be affected nor the capital impaired. 2. If there is reduction to meet an impairment – there will be no distribution.

Q: The stockholders of People Power, Inc. (PPI) approved two resolutions in a special stockholders' meeting: 1. Resolution increasing the authorized capital stock of PPI; and 2. Resolution authorizing the Board of Directors to issue, for cash payment, the new shares from the proposed capital stock increase in favor of outside investors who are non‐stockholders. The foregoing resolutions were approved by stockholders representing 99% of the total outstanding capital stock. The sole dissenter was Jimmy Morato who owned 1% of the stock. Are the resolutions binding on the corporation and its stockholders including Jimmy Morato, the dissenting stockholder? (1998 Bar Question)

NOTE: The distribution stated above is not mandatory, notwithstanding the authority granted by the CC for the same under Sec. 122, last par (ibid., pg. 357-358).

Over-issue of shares is not allowed An issue of stock by a corporation in excess of the amount prescribed or limited by its AOI is ultra vires and the stock so issued is void even in the hands of a bona fide purchaser for value (ibid., pg. 351). NOTE: An over-issued stock is a spurious stock (ibid).

A: No. The resolutions are not binding on the corporation and its stockholders including Jimmy Morato. While these resolutions were approved by the stockholders, the directors' approval, which is required by law in such case, does not exist.

Over-issue of stock does not avoid the original issue There is no avoidance of the original issue (ibid). NOTE: There is no over-issue in the case of shares, which were surrendered and new shares issued in their stead. The new issue in such case merely takes the place of the shares surrendered (ibid).

Q: What remedies, if any, are available to Morato? (1998 Bar Question)

Effects of an attempted unauthorized increase of capital stock

A: Jimmy Morato can petition the Securities and Exchange Commission to declare the two (2) resolutions, as well as any and all actions taken by the Board of Directors thereunder, null and void.

An attempted unauthorized increase of capital stock amounts to an over-issue and such stock is, therefore, absolutely void and cannot be validated by application of the doctrine of estoppel.

Evidence of the corporation’s indebtedness When a corporation borrows money, its indebtedness may be evidenced by notes or bonds as its primary security (De Leon, 2010).

Thus, the following are the effects of such unauthorized increase: 1. Subscriptions for such stock are likewise void both on the ground of illegality and for want of consideration; UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE NOTE: Pre-emptive right can only be exercised to the same class of shares issued or disposed with that owned by the stockholder (Share-a-like basis).

Difference between a note and a bond 1. If the amount borrowed is small and it is borrowed in a single sum, or from a few persons, or for a short time notes are usually given. 2. If, however, the amount is large and obtained from a number of people and extends over a period of years, the corporate obligation is preferably and usually evidenced by bonds (ibid).

Pre-emptive right is available on the re-issuance of treasury shares When a corporation reacquires its own shares which thereby become treasury shares, all shareholders are entitled to pre-emptive right when the corporation reissues or sells these treasury shares. The re-issuance of treasury shares is not among the exception provided by Sec. 39 when pre-emptive right does not exist.

Bonded indebtedness It is a long-term indebtedness secured by real or personal property (corporate assets).

Pre-emptive right may be waived

NOTE: The requirements for the power to incur, create or increase bonded indebtedness is also the same with the power to increase or decrease capital stock.

Pre-emptive right may be waived either expressly or impliedly as when the stockholder fails to exercise his pre-emptive right after being notified and given an opportunity to avail of such right.

Registration of the bonds issued by the corporation Bonds issued by a corporation shall be registered with the SEC which shall have the authority to determine the sufficiency of the terms thereof (Sec. 38, CC).

Transferability of pre-emptive right of a stockholder The pre-emptive right of a stockholder is transferable unless there is an express restriction in the AOI.

Stockholders’ approval is not required for all borrowings of the corporation

Q: Suppose that X Corporation has already issued the 1000 originally authorized shares of the corporation so that its Board of Directors and stockholders wish to increase X's authorized capital stock. After complying with the requirements of the law on increase of capital stock, X issued an additional 1000 shares of the same value. Assume that stockholder A presently holds 200 out of the 1000 original shares. Would A have a pre‐emptive right to 200 of the new issue of 1000 shares? Why?

Not all borrowings of the corporation need stockholders’ approval. Only bonded indebtedness requires such approval. POWER TO DENY PRE-EMPTIVE RIGHTS Pre-emptive right It is the preferential right of shareholders to subscribe to all issues or disposition of shares of any class in proportion to their present shareholdings (Sec. 39, CC).

A: Yes, A would have a pre‐emptive right to 200 of the new issue of 1000 shares. A is a stockholder of record holding 200 shares in X Corporation. According to the Corporation Code, each stockholder has the pre‐emptive right to all issues of shares made by the corporation in proportion to the number of shares he holds on record in the corporation.

NOTE: The stockholder must exercise his pre-emptive right within the time fixed in the resolution authorizing the increase of capital stock.

Purpose of pre-emptive right The purpose of pre-emptive right is to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus. Exercise of pre-emptive right

Q: Assuming a stockholder disagrees with the issuance of new shares and the pricing for the shares, may the stockholder invoke his appraisal rights and demand payment for his shareholdings? (1999 Bar Question)

Pre-emptive right must be exercised within the period stated in the AOI or the By-Laws. When the AOI and the By-Laws are silent, the Board may fix a reasonable time within which the stockholders may exercise the right.

A: No, the stockholder may not exercise appraisal right because the matter that he dissented from is not one of those where right of appraisal is available under the Corporation Code.

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MERCANTILE LAW Denial by the corporation of pre-emptive right

POWER TO SELL OR DISPOSE OF CORPORATE ASSETS (SLEMPAD)

The corporation can deny pre-emptive right if the AOI or any amendment thereto denies such right (Sec. 39, CC).

Substantially all of corporate assets There is a sale, lease, exchange, mortgage, pledge, and any other disposition (SLEMPAD) of substantially all of corporate asset if in the SLEMPAD thereof, the corporation would be rendered: 1. Incapable of continuing the business, or 2. Incapable of accomplishing the purpose for which it was incorporated (Sec 40, CC).

NOTE: A stockholder whose pre-emptive right is violated may maintain an action to compel the corporation to give him that right. If the denial is by amendment to the AOI, he may exercise his appraisal right under Sec. 81(1).

Instances when pre-emptive right is not available 1.

2.

3. 4. 5.

Shares to be issued to comply with laws requiring stock offering or minimum stock ownership by the public; Shares 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; Shares issued in payment of previously contracted debts; In case the right is denied in the AOI; Waiver of the right by the stockholder.

Procedural requirements for SLEMPAD of all or substantially all of corporate assets 1. Majority vote of the BOD or BOT; 2. Ratification by 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; 3. Written notice of the proposed action and of the time and place of the meeting 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 (Sec. 40, CC).

Pre-emptive right v. Right of first refusal PRE-EMPTIVE RIGHT Right to subscribe to all issuance or dispositions of shares of the corporation even to the subsequent sale of treasury stocks. Right exercised against the corporation. May be exercised even when there is no express provision in the AOI or amendment thereto. Pertains to unsubscribed portion of the authorized capital stock. It includes treasury shares.

RIGHT OF FIRST REFUSAL

NOTE: The sale of the assets shall be subject to the provisions of existing laws on illegal combinations and monopolies (ibid).

Right to purchase shares of a stockholder.

Further, in case of non-stock corporations, where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section (ibid).

Right exercised against a co-stockholder. Can only be exercised when so provided in the AOI, by-laws and printed in the stock certificate. Pertains to the sale of the stocks by another stockholder Does not include treasury shares

Instances when the corporation may forego the ratification by stockholders / members 1. If sale is necessary in the usual and regular course of business; 2. If the proceeds of the sale or other disposition of such property and assets are to be appropriated for the conduct of the remaining business; 3. If the transaction does not cover all or substantially all of the assets. Remedy of a stockholder who disagrees with the plan of SLEMPAD of all or substantially all of corporate assets Any dissenting stockholder shall have the option to exercise his appraisal right.

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE Abandonment of the plan for SLEMPAD even after the vote of the stockholders or members

Rule in order that a corporation may acquire its own shares

The BOD, in its discretion, may abandon the plan for SLEMPAD even after such authorization or approval by the stockholders, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members (ibid).

GR: The corporation may only acquire its own stocks in the presence of unrestricted retained earnings (URE) XPNs: (RDC) 1. Redeemable shares may be acquired even without surplus profit for as long as it will not result to the insolvency of the Corporation 2. In cases that the corporation conveys its stocks in payment of a Debt 3. In a Close corporation, a stockholder may demand the payment of the fair value of shares regardless of existence of retained earnings for as long as it will not result to the insolvency of the corporation.

Effect of sale of all or substantially all of assets of one corporation to another corporation GR: The corporation who acquired all or substantially all of the assets of the selling corporation shall not be liable for the debts of the latter. XPNs: 1. Express or implied assumption of liabilities; 2. Merger or consolidation; 3. If the purchase was in fraud of creditors; 4. If the purchaser becomes a continuation of the seller; 5. If there is violation of the Bulk Sales Law.

Unrestricted retained earnings (URE) It represents the surplus profits of the corporation. It is determined by subtracting the liabilities (L), the Capital Stock (CS) and the Restricted Retained Earnings (RRE) from the assets (A) of the corporation (URE = A – (L + CS+ RRE)).

POWER TO ACQUIRE OWN SHARES

Unrestricted Retained Earnings shall include accumulated profits and gains realized out of the normal and continuous operations of the company after deducting therefrom distributions of stockholders and transfers to capital stock or other accounts. It does NOT include: 1. Funds appropriated by its BOD for corporate expansion projects or programs; 2. Funds covered by a restriction for dividend declaration under a loan agreement; 3. Funds required to be retained under special circumstances obtaining in the corporation such as when there is a need for a special reserve for probable circumstances.

Instances when a corporation may acquire its own shares 1. 2.

3.

4. 5. 6. 7.

To eliminate fractional shares out of stock dividends (Sec. 41,CC); 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 (ibid.); To pay dissenting or withdrawing stockholders (in the exercise of the stockholder’s appraisal right) (ibid.); To acquire treasury shares (Sec. 9, CC); Redeemable shares regardless of existence of retained earnings (Sec 8, CC); To effect a decrease of capital stock(Sec. 38,CC); In close corporations, when there is a deadlock in the management of the business, the SEC may order the purchase at their fair value of the shares of any stockholder by a corporation regardless of the availability of unrestricted retained earnings (URE’s) in its books (par. 1 [4], Sec. 104, CC).

Guidelines for the acquisition of its own shares 1.

2. 3. 4.

NOTE: Where a corporation reacquires its own shares, it does not thereby become a subscriber thereof.

5.

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The capital of the corporation must not be impaired. There shall be URE’s to purchase the shares; Legitimate or proper corporate objective is advanced; Condition of the corporate affairs warrants it; Transaction is designed and carried out in good faith; Interest of creditors is not impaired, that is, the same is not violative of the trust fund doctrine (Sec. 41, SEC Opinions, Oct. 12, 1992, Sept. 11, 1985, and April 11, 1994). UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW NOTE: Investment of a corporation in a business which is in line with its primary purpose requires only the approval of the board. Any dissenting stockholder shall have appraisal right.

POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR BUSINESS The corporation is not allowed to engage in a business different from those enumerated in its AOI

POWER TO DECLARE DIVIDENDS

The corporation is not allowed to engage in a business different from those enumerated in its AOI unless the purpose will be amended to include the desired business activity among its secondary purpose.

Requirements for the declaration of dividends 1. Existence of URE’s; 2. Resolution of the board; and 3. Additional Requirements for stock dividends: a. A vote representing 2/3 of outstanding capital. (Sec. 43, CC) b. A corporation must have also a sufficient number of authorized unissued shares for distribution to stockholders.

NOTE: However, in the case of pawnshops organized as corporations and partnerships, they may be allowed to engage in ancillary activity of directly purchasing or selling goods or articles. The Pawnshop Regulation Act contains no prohibition to engage in ancillary activities. Hence, by implication, their scope may be extended to other unrelated business unless clearly prohibited by the said Act.

Forms of dividends

The only requirement is that the person or entity engaged at the same time in other business not directly related or not incidental to pawnshop business, shall keep such business distinct and separate from his pawnshop operations (De Leon, 2010 citing SEC Opinion, March 28, 1985).

1. Cash NOTE: Cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus cost and expenses (Sec. 43, CC).

2. Stock

Rule in case a corporation wants to invest in an undertaking

NOTE: Stock dividends are withheld from the delinquent stockholder until his unpaid subscription is fully paid (ibid).

GR: Investment of a corporation in a business which is in line with its primary purpose requires only the approval of the board.

3. Property NOTE: Stockholders are entitled to dividends PRO‐RATA based on the total number of shares and not on the amount paid on shares.

XPN: Where the corporation undertakes to invest in another corporation or business or for any purpose other than a primary purpose, it has to comply with the statutory requirements before it can do so (Sec. 42, CC).

Cash dividends v. Stock dividends CASH DIVIDENDS Part of general fund Results in cash outlay

Statutory requirements that the corporation needs to comply with to invest in another corporation or business or for any purpose other than a primary purpose 1. 2.

3. 4.

Not subject to levy by corporate creditors

Approval by the majority vote of the BOD or BOT Ratification by 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 Ratification must be made at a meeting duly called for the purposes, and Prior written notice of the proposed investment and the time and place of the meeting shall be made addressed to each stockholder or member by mail or by personal service.

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Declared only by the board of directors at its discretion (majority of the quorum only, not majority of all the board) Does not increase the corporate capital Its declaration creates a debt from the

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STOCK DIVIDENDS Part of capital No cash outlay Once issued, can be levied by corporate creditors because they’re part of corporate capital Declared by the board with the concurrence of the stockholders representing at least 2/3 of the outstanding capital stock at a regular/special meeting Corporate capital is increased No debt is created by its declaration

CORPORATION CODE corporation to each of its stockholders If received by individual: subject to tax; If received by corporation: not subject to tax Cannot be revoked after announcement Applied to the unpaid balance of delinquent shares

XPN: It can be used in the declaration of dividends provided the following conditions exist: 1. The corporation has sufficient income from operations from which the depreciation on the appraisal increase was charged;

Not subject to tax either received by individual or a corporation

2. It has no deficit at the time the depreciation on the appraisal increase was charged to operations; and

Can be revoked despite announcement but before issuance Can be withheld until payment of unpaid balance of delinquent shares

3. Such depreciation on appraisal increase previously charged to operations has not been erased or impaired bysubsequent losses; otherwise, only that portion not impaired by subsequent losses is available for dividend (SEC Opinions, Oct. 2, 1981 and March 19, 1992). 4. Reduction surplus – the surplus arises from the reduction of the par value of the issued shares of stocks. It cannot be declared as cash dividend but can be declared only as stock dividends.

Scrip dividend A scrip dividend is dividend issued by the corporation when the obligation to pay becomes absolute. Thus, it becomes a debt absolutely due to the stockholders although payment is postponed to a future date (De Leon, supra, pg. 431).

5. Gain from Sale of Real Property - Available as dividends 6. Treasury Shares – Gain realized from reissuance of treasury shares. It Cannot be declared as stock or cash dividends but it may be declared as property dividend

Stock split It is merely a dividing up of the outstanding shares of a corporation into a greater number of units, without disturbing the stockholder’s original proportional participating interest in the corporation.

Prohibition imposed by law on URE's of a stock corporation GR: Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock.

Stock split is different from stock dividend. Stock dividend is a capitalization of earnings or profits, together with a distribution of the added shares which evidence the assets transferred to capital. The stock split, on the other hand, is a mere increase in the number of shares which evidence ownership without altering the amount of the capital, surplus, or segregated earnings (ibid., pg. 435).

XPNs: 1. When justified by definite corporate expansion projects or programs approved by the board of directors; 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; 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 (Sec. 43, CC).

Sources of retained earnings 1. Paid-in surplus – It is the difference between the par value and the issued value or selling price of the shares. It cannot be declared as cash dividend but can be declared only as stock dividends 2. Operational Income - The amount of profit realized from a business's operations after taking out operating expenses. It is available for both cash and stock dividends 3. Revaluation surplus – Increase in the value of a fixed asset as a result of its appreciation. They are by nature subject to fluctuations.

Penalty in case of unjustifiable retention of surplus profits The penalty in case a corporation unjustifiably retains surplus profits in excess of one hundred (100%) percent of the paid in accumulated capital is the payment of Improperly Earnings Tax equal to 10% of

GR: It cannot be declared as dividends because there is no actual gain.

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MERCANTILE LAW the improperly accumulated taxable income (NIRC OF 1997, Sec. 29 [A]).

A: No. Only stockholders are entitled to payment of stock dividends (Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., G.R. No. 21763, Dec. 17, 1966).

Q: During the annual stockholders meeting, Cheryl, a majority stockholder, proposed that a part of the corporation’s URE's be capitalized and stock dividends be distributed to the stockholders. Can she compel the corporation to declare stock dividends? (2001 Bar Question)

POWER TO ENTER INTO MANAGEMENT CONTRACT Management contract It is 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 (Sec. 44, CC).

A: No. Stock dividends should initially be taken by the BOD and thereafter to be concurred in by a 2/3 vote of the stockholders. A stockholder cannot compel the corporation to declare neither cash nor stock dividends as it rests with the sound discretion of the board.

NOTE: Sec. 44 refers only to a management contract with another corporation. Hence, it does not apply to management contracts entered into by a corporation with natural persons (ibid).

Sources of dividends GR: Dividends can only be declared out of actual and bona fide unrestricted retained earnings

Requirements for a management contract to be valid

XPN: Dividends can be declared out of capital in the following instances: 1. Dividends from investments wasting assets corporation; 2. Liquidating dividends

1. Contract must be approved by the majority of the BOD or BOT of both managing and managed corporation; 2. Ratified by the stockholders owning at least the majority of the outstanding capital stock, or members in case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose 3. Contract must be approved by the stockholders of the managed corporation owning at least 2/3 of the outstanding capital stock entitled to vote or 2/3 of the members when: a. Stockholders representing the same interest in both of the managing and the managed corporation own or control more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation (interlocking stockholders); b. Majority of the members of the BOD of the managing corporation also constitute a majority of the BOD of the managed corporation. (interlocking directors) (Sec. 44, CC).

Wrongful or illegal declaration of dividends In case of wrongful or illegal declaration of dividends, the Board of Directors is liable. The stockholders should return the dividends to the corporation (solutio indebiti). Persons entitled to receive dividends Dividends are payable to the stockholders of record as of the date of the declaration of dividends or holders of record (Cojuanco and Prime Holdings, Inc., v. Sandiganbayan G.R. No. 183278, April 24, 2009). Rule on the receipt of dividends in case of mortgaged or pledged shares GR: The mortgagor or the pledgor has the right to receive the dividends.

A corporation can enter into a management contract with a natural person without complying with the requisites of Sec. 44

XPN: When the mortgagor or pledgor defaults and the mortgagee or pledgee acquires the pledged stocks and the transfer is recorded in the books of the corporation, the mortgagee or pledgee is entitled to receive the dividends.

Sec 44 refers only to a management contract with another corporation. Hence, it does not apply to management contracts entered into by a corporation with natural persons.

Q: May stock dividends be issued to a person who is not a stockholder in payment of services rendered?

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE Period for every management contract entered into by the corporation

Doctrine of apparent authority 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 possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority. Instance when the corporation is estopped to deny ratification of contracts or acts entered by its officers or agents

GR: Management contract shall be entered into for a period not longer than 5 years for any one term. XPN: In cases of service contracts or operating agreements which relate to the exploitation, development, exploration or utilization of natural resources, it may be entered for such periods as may be provided by the pertinent laws or regulations. ULTRA VIRES ACTS

Generally, when the corporation has knowledge that its officers or agents exceed their power, it must promptly disaffirm the contract or act, and allow the other party or third person to act in the belief that it was authorized or has been ratified. Otherwise, if it acquiesces, with knowledge of the facts, or if it fails to disaffirm, ratification will be implied (Premiere Development Bank vs. CA, G.R. No. 159352, Apr. 14, 2004).

Ultra vires act An ultra vires act refers to an act outside or beyond express, implied and incidental corporate powers. The concept also includes those acts that may ostensibly be within such powers but are, by general or special laws, either proscribed or declared illegal (Rural Bank of Milaor v Ocefemia, G.R. No. 137686, February 8, 2000).

Q: Five (5) parcels of land subject of this case were originally owned by Juanita Arellano Ocfemia and Felicisimo Ocfemia. During their lifetime,the said five (5) parcels of land and two (2) others were mortgaged to Rural Bank of Milaor (RBM). The spouses Felicisimo and Juanita were not able to redeem the mortgaged properties and so the mortgage was foreclosed and thereafter ownership thereof was transferred to RBM. Out of the seven (7) parcels that were foreclosed, five (5) of them are in the possession of the the grandchildren of the spouses Felicisimo and Juanita because these five (5) parcels of land were sold by RBM bank to the children of the spoues. The five (5) parcels of land have not been, however transferred in the name of the children of the spouses after they were sold because according to the Assessor's Office the five (5) parcels of land, subject of the sale, cannot be transferred in the name of the buyers as there is a need to have the document of sale registered with the Register of Deeds (RD). In view of the foregoing, Marife, the grandchild of the spouses went to the RD with the Deed of Sale in order to have the same registered. The RD however, informed her that the document of sale cannot be registered without a board resolution of RBM. Marife went to the bank and requested the for a board resolution so that the property can be transferred to the name of Renato Ocfemia. RBM refused her request for a board resolution and made many alibis. After some time, she was told that the resolution of the board would not be released because the RBM had no records from the old manager. May the board of directors of

Types of UVA 1. 2. 3.

Acts done beyond the powers of the corporation (through BOD) Ultra vires acts by corporate officers Acts or contracts which are per se illegal as being contrary to law. Applicability of ultra vires doctrine

Ultra vires acts by reason of lack of authority v. Ultra vires acts by reason of illegality (illegal acts) BASIS Lawfulness Ratification Binding effect

ULTRA VIRES ACT Not necessarily unlawful, but outside the powers of the corporation Can be ratified Can bind the parties if wholly or partly executed

ILLEGAL ACTS Unlawful; against law, morals, public policy, and public order Cannot be ratified Cannot bind the parties

Instances when the act of the officers bind the corporation 1. If it is provided in the by-laws 2. If authorized by the board 3. Under the doctrine of apparent authority 4. When the act was ratified

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW a rural banking corporation be compelled to confirm a deed of absolute sale of real property owned by the corporation which deed of sale was executed by the bank manager without prior authority of the board of directors of the rural banking corporation?

on them of a final decision or resolution of this Court affirming Associated Bank’s right to possess the property. After they made the request and after the payment deadline had lapsed, Spouses Pronstroller and Atty. Soluta, acting for the Associated Bank, executed another Letter-Agreement allowing the former to pay the balance of the purchase price upon receipt of a final order from this Court (in the Vaca case) and/or the delivery of the property to them free from occupants. Is the Associated Bank bound by the Letter-Agreement signed by Atty. Soluta under the doctrine of apparent authority?

A: Yes. The corporation may be compelled. A bank is liable to innocent third persons where representation is made in the course of its normal business by an agent like the bank manager, even though such agent is abusing her authority. Clearly, persons dealing with her could not be blamed for believing that she was authorized to transact business for and on behalf of the bank. The bank is estopped from questioning the authority of the bank manager to enter into the contract of sale. If a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds the agent out to the public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent's authority. Unquestionably, the bank has authorized its manager to enter into the Deed of Sale. Accordingly, it has a clear legal duty to issue the board resolution sought by respondent's. Having authorized her to sell the property, it behooves the bank to confirm the Deed of Sale so that the buyers may enjoy its full use (Rural Bank of Milaor (Camarines Sur) v. Francisca Ocfemia, et al., G.R. No. 137686, February 8, 2000).

A: Yes. The authority of a corporate officer or agent in dealing with third persons may be actual or apparent. Apparent authority is derived not merely from practice. Its existence may be ascertained through 1) the general manner in which the corporation holds out an officer or agent as having the power to act, or in other words, the apparent authority to act in general, with which it clothes him; or 2)the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers. Accordingly, the authority to act for and to bind a corporation may be presumed from acts of recognition in other instances, wherein the power was exercised without any objection from its board or shareholders. Undoubtedly, Associated Bank had previously allowed Atty. Soluta to enter into the first agreement without a board resolution expressly authorizing him; thus, it had clothed him with apparent authority to modify the same via the second letter-agreement. It is not the quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the power to bind the corporation (Associated Bank v. Spouses Rafael and Monaliza Pronstroller, G.R. No. 148444, July 14, 2008).

Q: The spouses Vaca executed REM in favor of Associated Bank over their parcel of residential land and the house constructed thereon. For failure of the spouses Vaca to pay their obligation, the subject property was sold at public auction with Associated Bank as the highest bidder. The Transfer Certificate of Title in the name of spouses Vaca, was cancelled and a new one was issued in the name of the Associated Bank. The spouses Vaca, however, commenced an action for the nullification of the real estate mortgage and the foreclosure sale. Associated Bank, on the other hand, filed a petition for the issuance of a writ of possession which was denied by the RTC. Associated Bank, thereafter, obtained a favorable judgment when the CA granted its petition but the spouses Vaca questioned the CA decision. During the pendency of the cases, Associated Bank advertised the property for sale to interested buyers. Rafael and Monaliza Pronstroller bought the same. In view of the pendency of the case between the spouses Vaca and Associated Bank involving the property, Spouses Pronstroller requested that the balance of the purchase price be made payable only upon service UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Spouses Maglasang obtained a loan from PCRB. To secure the payment of the subject loan, a REM was executed. Before the subject loan became due, the spouses Maglasang asked PCRB’s permission to sell the subject properties. They likewise requested that the subject properties be released from the mortgage since the two other loans were adequately secured by other mortgages. The spouses Maglasang claimed that the PCRB, acting through its Branch Manager, Pancrasio Mondigo, verbally agreed to their request, hence, spouses Maglasang sold to Violeta Banate the subject properties. The spouses Magsalangused the amount to pay the subject loan with PCRB. After settling the subject loan, PCRB gave the owner’s duplicate

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CORPORATION CODE certificate of title to Banate, who was able to secure a new title in her name. The title, however, carried the mortgage lien in favor of PCRB, prompting the Banate to request from PCRB a Deed of Release of Mortgage. As PCRB refused to comply with the Banate’s request, Banate instituted an action for specific performance to compel PCRB to execute the release deed. Since the subject loan had been fully paid, the RTC considered the petitioners as rightfully entitled to a deed of release of mortgage, pursuant to the verbal agreement that Banate made with PCRB’s branch manager, Mondigo. The CA reversed. It ruled that Mondigo cannot orally amend the mortgage contract between PCRB, and the spouses Maglasang therefore, the claimed commitment allowing the release of the mortgage on the subject properties cannot bind PCRB. Did the purported agreement between Banate and Mondigo novate the mortgage contract over the subject properties and is thus binding upon PCRB?

Branch. The second portion of the pagares, signed by that branch’s manager Gregory Grey, stated that the assignment has been duly accepted and payment duly guaranteed within 60 days from PPI’s Invoice. But contrary to her undertakings, Layson withdrew with branch manager Grey’s connivance, the loan that UCPB granted her. On the strength of the three documents, PPI delivered quantities of fertilizers to Layson. When PPI presented the documents of the financed transactions to UCPB for collection, the bank denied the claim on the ground that it neither authorized the transactions nor the execution of the documents which were not part of its usual banking transactions. UCPB claimed that branch manager Grey exceeded his authority in guaranteeing payment of Layson’s purchases on credit. UCPB contends that the pagares were illegal and void since banking laws prohibit bank officers from guaranteeing loans of bank clients. Is UCPB bound by Grey’s undertaking on its behalf to deliver to PPI the proceeds of the bank’s loan in payment of the fertilizers Layson bought?

A: No. The Court would be unduly stretching the doctrine of apparent authority if the Court would consider the power to undo or nullify solemn agreements validly entered into as within the doctrine’s ambit. Although a branch manager, within his field and as to third persons, is the general agent and is in general charge of the corporation, with apparent authority commensurate with the ordinary business entrusted him and the usual course and conduct thereof, yet the power to modify or nullify corporate contracts remains generally in the board of directors. Being a mere branch manager alone is insufficient to support the conclusion that Mondigo has been clothed with “apparent authority” to verbally alter terms of written contracts, especially when viewed against the telling circumstances of this case: the unequivocal provision in the mortgage contract; PCRB’s vigorous denial that any agreement to release the mortgage was ever entered into by it; and, the fact that the purported agreement was not even reduced into writing considering its legal effects on the parties’ interests. To put it simply, the burden of proving the authority of Mondigo to alter or novate the mortgage contract has not been established (Violeta Tudtud Banate, et al., v. Philippine Countryside Rural Bank, Inc., et al., G.R. No. 163825, July 13, 2010).

A: No. UCPB is not bound. A corporation like UCPB is liable to innocent third persons where it knowingly permits its officer, or any other agent, to perform acts within the scope of his general or apparent authority, holding him out to the public as possessing power to do those acts. But, here, it is plain from the guarantee Grey executed that he was acting for himself, not in representation of UCPB. UCPB cannot be bound by Grey’s above undertaking since he appears to have made it in his personal capacity. He signed it under his own name, not in UCPB’s name or as its branch manager. Indeed, the wordings of the undertaking do not at all make any allusion to UCPB (United Coconut Planters Bank v. Planters Products, Inc., et al., G.R. No. 179015, June 13, 2012). Consequences of ultra vires acts Effects of an ultra vires act Ultra vires acts entered into by the board of directors binds the corporation and the courts will not interfere unless terms are oppressive and unconscionable (Gamboa vs. Victoriano, G.R. No. L-43324. May 5, 1979).

Q: PPI, a fertilizer manufacturer, entered into an arrangement with Janet Layson for the delivery of fertilizers to her, payable from the proceeds of the loan that UCPB extended to her. Layson executed a document called “pagares,” written on the dorsal side of a UCPB promissory note. The pagares stated that Layson had an approved loan with UCPB-Iloilo

These are the effects for the specific acts: 1. Executed contract – courts will not set aside or interfere with such contracts; 2. Executory contracts – no enforcement even at the suit of either party (void and unenforceable);

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MERCANTILE LAW 3. Partly executed and partly executory – principle of “no unjust enrichment at expense of another” shall apply; 4. Executory contracts apparently authorized but ultra vires – the principle of estoppel shall apply.

with Manila Resource Development Corporation (MANRED). Subsequently, Oabel was transferred to MANRED, with the latter deporting itself as her employer. After sometime, Oabel filed before the Labor Arbiter a petition for regularization of employment against the Maranaw Hotels. However, Oabel was dismissed from employment. Oabel converted her petition for regularization into a complaint for illegal dismissal. The NLRC found that Oabel was illegally dismissed. Maranaw Hotels subsequently appealed before the CA. The CA dismissed the petition on account of the failure of the Maranaw Hotels to append the board resolution authorizing the counsel for Maranaw Hotels to file the petition before the Court of Appeals. Maranaw Hotels invokes substantial justice as justification for a reversal of the resolution of the Court of Appeals. It contends that the filing of a motion for reconsideration with the certificate of non-forum shopping attached constitutes substantial compliance with the requirement. Did the petition before the CA comply with the procedural requirements under the law and the rules?

Remedies in case of ultra vires act 1. State a. Obtain a judgment of forfeiture; or b. The SEC may suspend or revoke the certificate of registration 2. Stockholders a. Injunction; or b. Derivative suit 3. Creditors - Nullification of contract in fraud of creditors. Q: X Corp., whose business purpose is to manufacture and sell vehicles, invested its funds in Y Corp., an investment firm, through a resolution of its Board of Directors. The investment grew tremendously on account of Y Corp.'s excellent business judgment. But a minority stockholder in X Corp. assails the investment as ultra vires. Is he right and, if so, what is the status of the investment? (2011 Bar Question)

A: No. Well-settled is the rule that the certificate of non-forum shopping is a mandatory requirement. Substantial compliance applies only with respect to the contents of the certificate but not as to its presence in the pleading wherein it is required. Furthermore, the lawyer acting for the corporation must be specifically authorized to sign pleadings for the corporation. Specific authorization, the Court held, could only come in the form of a board resolution issued by the Board of Directors that specifically authorizes the counsel to institute the petition and execute the certification, to make his actions binding on his principal,i.e., the corporation. The SC has not wavered in stressing the need for strict adherence to procedural requirements. The rules of procedure exist to ensure the orderly administration of justice. They are not to be trifled with lightly (Maranaw Hotels and Resort Corporation v. CA, et al., G.R. No. 149660, January 20, 2009).

A: Yes, it is an ultra vires act of its Board of Directors but voidable only, subject to stockholders’ ratification. POWERS HOW EXERCISED BY THE SHAREHOLDERS The shareholders participate in controlling the affairs of the corporation by exercising their right to vote. They can elect the directors who will actually govern the corporation and they can also vote on important matters that are still reserved to them by the Corporation Code (Aquino, 2006). BY THE BOARD OF DIRECTORS

Q: MLDC is the registered owner of a piece of land. MLDC represented by its Chairman and President, Ronaldo Salonga, and ECRM Enterprises, represented by its proprietor, Mario P. Tablante, executed an agreement whereby the former would lease to the latter an area to be used as the staging area for the Home and Garden Exhibition Fair. On the date of the expiration of the Lease Agreement, Tablante assigned all his rights and interests under the said agreement to Rockland Co. under a Deed of Assignment of the same date. MLDC eventually learned that Tablante had executed a contract

The Board of Directors is primarily responsible for the governance of the corporation. Their primary duty is to set the policies for the accomplishment of the corporate objectives (Revised Code of Corporate Governance, Art. 3). They elect the officers who carry out the policies that they have established. Q: Sheryl Oabel was initially hired by Maranaw Hotel as an extra beverage attendant. Oabel worked in Century Park Hotel, an establishment owned by the Maranaw Hotels. Maranaw Hotels contracted UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE of lease with MC Home Depot, Inc. over the same parcel of land. Thereafter, MC Home Depot, Inc. constructed improvements on the land and subdivided the area into fifty-nine (59) commercial stalls, which it leased to various entities. Upon the expiration of the lease, MLDC demanded that Tablante, MC Home Depot, and Rockland vacate the land. MLDC filed a case for unlawful detainer against Tablante, MC Home Depot, and Rockland. The MTC held that it has no jurisdiction over the case. The RTC affirmed. The CA dismissed the petition on the ground that the verification and certification against non-forum shopping was signed by a certain Antonio A. Merelos as General Manager of MLDC without attaching therewith a Corporate Secretary’s certificate or board resolution that he is authorized to sign for and on behalf of the MLDC. Does the failure to attach the verification and certification against forum shopping in petition justify the dismissal of the case? A: No. It must be borne in mind that Sec. 23, in relation to Sec. 25 of the Corporation Code, clearly enunciates that all corporate powers are exercised, all business conducted, and all properties controlled by the board of directors. Thus, it is clear that an individual corporate officer cannot solely exercise any corporate power pertaining to the corporation without authority from the board of directors. However, the Court has recognized the authority of some corporate officers to sign the verification and certification against forum shopping. In sum, the following officials or employees of the company can sign the verification and certification without need of a board resolution: (1) the Chairperson of the Board of Directors, (2) the President of a corporation, (3) the General Manager or Acting General Manager, (4) Personnel Officer, and (5) an Employment Specialist in a labor case. The rationale applied in the foregoing cases is to justify the authority of corporate officers or representatives of the corporation to sign the verification or certificate against forum shopping, being in a position to verify the truthfulness and correctness of the allegations in the petition. From the foregoing, it is thus clear that the failure to attach the Secretary’s Certificate, attesting to General Manager Antonio Merelos’s authority to sign the Verification and Certification of Non-Forum Shopping, should not be considered fatal to the filing of the petition (Mid-Pasig Land Development Corporation v. Mario Tablante, doing business under the name and style ECRM Enterprises, G.R. No. 162924, February 4, 2010).

BY THE OFFICERS After the election of directors, the latter must formally organize by electing the corporate officers (Sec. 25, CC). The corporate officers are tasked to carry out the policies laid down by the Board, the AOI and the by-laws. Corporate officer’s position 1.

An “office” that is created by the charter of the corporation and 2. The officer is elected by the directors or stockholders (Easycall Communications Phils., Inc. vs. Edward King, G.R. No.145901, Dec. 15, 2005). Limitations on the holding of a corporate officer’s position Any two or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time (Sec. 25, CC). Positions of corporate officers to be filled up by the Directors CORP. OFFICER

1.President

2.Secretary

3.Treasurer 4. Such other officers as may be provided in the by-laws

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MEMBERSHIP REQUIREMENT 1. Must be a director at the time he assumes office 2. must be the stockholder on record of at least 1 share of stock May or may not be a director, unless required by the by-laws

CITIZENSHIP

RESIDENCY

Need NOT be a Filipino Citizen

Need NOT be a Philippine Resident

Must be a Filipino Citizen

Must be a Philippine Resident

Need Must be a NOT be a Philippine Filipino Resident Citizen Qualifications may be provided for in the by-laws May or may not be a director

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Corporate officer v. Corporate employee CORPORATE OFFICER Position is provided for in the by-laws or under the Corporation Code. RTC acting as a special commercial court has jurisdiction over intra-corporate controversies. Power to amend/repeal articles cannot be delegated by the stockholders/ members to the board of directors/ trustees

Directors/Trustees. Moreover, the Board of Directors of Matling could not validly delegate the power to create a corporate office to the President, in light of Section 25 of the Corporation Code requiring the Board of Directors itself to elect the corporate officers. Verily, the power to elect the corporate officers is a discretionary power that the law exclusively vested in the Board of Directors, and could not be delegated to subordinate officers or agents. The office of Vice President for Finance and Administration created by Matling’s President pursuant to the By-Law was an ordinary, not a corporate, office (Matling Industrial and Commercial Corporation, et al., v. Ricardo R. Coros, G.R. No. 157802, October 10, 2010).

CORPORATE EMPLOYEE Employed by the action of the managing officer of the corporation. Labor Arbiter has jurisdiction in case of labor disputes. Power to amend or repeal by-laws or adopt new by-laws may be delegated by the 2/3 of the outstanding capital stock or 2/3 of the members in the case of non-stock corporation

TRUST FUND DOCTRINE Trust fund doctrine The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits, and which the corporation may not dissipate. The creditors may sue the stockholders directly for the latter’s unpaid subscription.

Q: Ricardo Coros was dismissed by Matling Industrial and Commercial Corporation (Matling) as its Vice President for Finance and Administration. Because of this, Coros filed a complaint for illegal suspension and illegal dismissal against Matling and some of its corporate officers with the NLRC. Matling, et al., moved to dismiss the complaint, raising the ground, among others, that the complaint pertained to the jurisdiction of the SEC due to the controversy being intra-corporate inasmuch as Coros was a member of Matling’s Board of Directors aside from being its Vice-President for Finance and Administration prior to his termination. It further argues that the power to create corporate offices and to appoint the individuals to assume the offices was delegated by Matling’s Board of Directors to its President through its By-Laws; and that any office the President created, like the position of the Coros, was as valid and effective a creation as that made by the Board of Directors, making the office a corporate office. Is Coros a corporate officer of Matling?

Effects of the trust fund doctrine 1. Dividends must never impair the subscribed capital stock and must only be declared out of URE’s 2. Subscription commitments cannot be condoned or remitted 3. GR: The corporation cannot buy its own shares using the subscribed capital as the consideration therefore (NTC v. Court of Appeals, G.R. No. 127937. July 28, 1999). XPN: (RDC) a. Redeemable shares may be acquired even without 0o]surplus profit for as long as it will not result to the insolvency of the Corporation b. In cases that the corporation conveys its stocks in payment of a Debt c. In a Close corporation, a stockholder may demand the payment of the fair value of shares regardless of existence of retained earnings for as long as it will not result to the insolvency of the corporation

A: No. Pursuant to Section 25 of the Corporation Code, whoever are the corporate officers enumerated in the by-laws are the exclusive officers of the corporation and the Board has no power to create other offices without amending first the corporate By-laws. However, the Board may create appointive positions other than the positions of corporate officers, but the persons occupying such positions are not considered as corporate officers within the meaning of Section 25 of the Corporation Code and are not empowered to exercise the functions of the corporate officers, except those functions lawfully delegated to them. Their functions and duties are to be determined by the Board of UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

4. Rescission of a subscription agreement is not allowed since it will effectively result in the unauthorized distribution of the capital assets and property of the corporation (Ong v Tiu, ibid).

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CORPORATION CODE Exceptions to the trust fund doctrine

At least 2 or such number of independent directors that constitute 20% of the members of the board whichever is lesser, but in no case less than 2 (Art. 3 [A], RCCG).

The Code allows distribution of corporate capital only in these instances: 1. Amendment of the AOI to reduce authorized capital stock; 2. Purchase of redeemable shares by the corporation regardless of existence of unrestricted retained earnings; 3. Dissolution and eventual liquidation of the corporation.

BUSINESS JUDGMENT RULE Business Judgment Rule GR: Contracts intra vires entered into by the board of directors are binding upon the corporation beyond the interference of courts. The courts are barred from intruding into business judgments of corporations, when the same are made in good faith (Ong v Tiu, G.R. No. 144476. April 8, 2003).

BOARD OF DIRECTORS AND TRUSTEES DOCTRINE OF CENTRALIZED MANAGEMENT

XPNs: Courts can inquire unto contracts which are: 1. Unconscionable and oppressive as to amount to wanton destruction to the rights of the minority (Ong v Tiu, ibid). 2. Bad faith or gross negligence by the directors (Republic Communications Inc v CA, G.R. No. 135074, January 29, 1999).

Doctrine of Centralized Management The Doctrine of Centralized Management states that all corporate powers are exercised by the BOD or BOT (Sec. 23, CC). However, this doctrine is not applicable to the following instances: 1. In case of delegation to the Executive Committee duly authorized in the by-laws; 2. Authorization pursuant to a contracted manager which may be an individual, a partnership, or another corporation. 3. In case of close corporations, the stockholders may manage the business of the corporation instead by a board of directors, if the articles of incorporation so provide.

Consequences of Business Judgment Rule 1.

2.

Independent director 3. For this purpose, an “independent director” shall mean a person other than an officer or employee of the corporation, its parent or subsidiaries, or any other individual having a relationship with the corporation, which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.

4.

Cases where independent directors are required At least two (2) independent directors are required in the following companies; 1. Any corporation with a class of equity securities listed for trading on an Exchange (Publicly traded companies); 2. Banks; 3. Corporations with secondary franchise.

5.

Required number of independent directors for the corporations covered by the Revised Code of Corporate Governance (RCCG)

191

Resolutions and transactions entered into by the Board within the powers of the corporation cannot be reversed by the courts not even on the behest of the stockholders. Directors and officers acting within such business judgment cannot be held personally liable for such acts. If the cause of the losses is merely error in business judgment, not amounting to bad faith or negligence, directors and/or officers are not liable (Filipinas Port Services v Go, G.R. No. 161886, March 16, 2007). The Board of Directors has the power to create positions not provided for in the corporation's bylaws since the board is the corporation’s governing body, clearly upholding the power of its board to exercise its prerogatives in managing the business affairs of the corporation (Filipinas Port Services v Go, ibid). Directors and officers who purport to act for the corporation, keep within the lawful scope of their authority and act in good faith, do not become liable, whether civilly or otherwise, for the consequences of their acts, which are properly attributed to the corporation alone (Benguet Electric Cooperative, Inc. v. NLRC,GR 89070, May 18, 1992).

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Q: PALI sought to offer its shares to the public in order to raise funds for development of properties and pay its loans with several banks. To facilitate the trading of its shares, PALI applied for a listing in the Philippine Stock Exchange Inc. (PSE), a non-profit corporation. Subsequently, PSE received a letter from the Heirs of Marcos, requesting PSE to defer PALI’s registration, contending that certain properties of PALI are owned by Marcos. Consequently, PSE rejected PALI’s application. The SEC reversed the ruling of the PSE. Is the SEC correct?

A director cannot be elected without owning any stock in the corporation A person who does not own a stock at the time of his election or appointment does not disqualify him as director if he becomes a shareholder before assuming the duties of his office (SEC Opinions, Nov. 9, 1987 & Apr. 5, 1990). Q: Grace Christian High School is an educational institution at the Grace Village in Quezon City. Grace Village Association, Inc., on the other hand, is an organization of lot and/or building owners, lessees and residents at Grace Village. A committee of the board of directors of the Association prepared a draft of an amendment to the by-laws. The draft was never presented to the general membership for approval. Nevertheless, from 1975, after it was presumably submitted to the board, up to 1990, Grace Christian High School was given a permanent seat in the board of directors of the association. After some time, the association’s committee on election informed James Tan, principal of the school, that all directors should be elected by members of the association. For this reason, Tan was told that the proposal to make the Grace Christian High School representative as a permanent director of the association, although previously tolerated in the past elections should be reexamined. Grace Christian High School argues that it had acquired a vested right to a permanent seat in the board of directors. Did Grace Christian High School acquire vested right to a permanent seat in the board of directors?

A: No. In applying the business judgment rule, the SEC and the courts are barred from intruding into business judgments of corporations, when the same are made in good faith. The said rule precludes the reversal of the decision of the PSE to deny PALI's listing application, absent a showing of bad faith on the part of the PSE. Under the listing rules of the PSE, to which PALI had previously agreed to comply, the PSE retains the discretion to accept or reject applications for listing (PSE v CA, G.R. No. 125469, October 27, 1997). TENURE, QUALIFICATIONS AND DISQUALIFICATIONS OF DIRECTORS OR TRUSTEES Term of office of BOD/BOT GR: The regular director shall hold office for 1 year. XPN: If no election is held, the directors and officers will continue to occupy position even after the lapse of 1 year under a hold-over capacity until their successors are elected and qualified.

A: No. The board of directors of corporations must be elected from among the stockholders or members. Section 28 of the Old Corporation Code provides that unless otherwise provided, the corporate powers of all corporations formed under this Act shall be exercised, all business conducted and all property of such corporations controlled and held by a board of not less than five nor more than eleven directors to be elected from among the holders of stock or, where there is no stock, from the members of the corporation. Section 29 also states that directors of the corporation shall be elected annually by the stockholders if it be a stock corporation or by the members if it be a nonstock corporation, and if no provision is made in the by-laws for the time of election the same shall be held on the first Tuesday after the first Monday in January. Moreover, the term of the board of directors or trustee is embodied in Section 23 stating that a member of the board of director should be elected from among the holders of stocks, or where there is no stock, from among the

NOTE: This is applicable to a going concern where there is no break in the exercise of the duties of the officers and directors (SEC Opinion, Dec. 15, 1989).

Common qualifications of a director and trustee 1. 2.

3. 4.

Majority of the directors/trustees must be residents of the Philippines (Sec. 23, CC). He must not have been convicted by final judgment of an offense punishable by imprisonment for period exceeding 6 years or a violation of the Corporation Code, committed within 5 years prior to the date of his election (Sec. 27, CC). He must be of legal age Other qualifications as may be prescribed in special laws or regulations or in the by-laws of the corporation

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192

CORPORATION CODE members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified. Since the provision in question is contrary to law, the fact that for fifteen years it has not been questioned or challenged but, on the contrary, appears to have been implemented by the members of the association cannot forestall a later challenge to its validity. Neither can it attain validity through acquiescence because, if it is contrary to law, it is beyond the power of the members of the association to waive its invalidity (Grace Christian High School v. CA, et al., G.R. No. 108905, October 23, 1997).

A: Yes. A corporation is authorized to prescribe the qualifications of its directors. A provision in the by-laws of the corporation that no person shall qualify or be eligible for nomination for elections to the board of directors if he is engaged in any business which compete with that of the Corporation is valid; provided, however, that before such nominee is disqualified, he should be given due process to show that he is not covered by the disqualification. A director stands in fiduciary relation to the corporation and its stockholders. The disqualification of a competitor from being elected to the board of directors is a reasonable exercise of corporate authority. Sound principles of corporate management counsel against sharing sensitive information with a director whose fiduciary duty to loyalty may well require that he discloses this information to a competitive rival (John Gokongwei, Jr. v. SEC, et al., G.R. No. L-45911, April 11, 1979).

Additional qualifications provided by the Revised Code of Corporate Governance A director should have the following: 1. College education or equivalent academic degree 2. Practical understanding of the business of the corporation 3. Membership in good standing in relevant industry, business or professional organizations 4. Previous business experience (Art. 3 [D], RCCG)

Foreigners are not disqualified from being elected/ appointed as members of the BOD While foreigners are disqualified from being elected/ appointed as corporate officers in wholly or partially nationalized business activities, they are allowed representation in the BOD or governing body of said entities in proportion to their shareholding (Anti-Dummy Law, Sec. 2-A; Constitution, Sec. 11, Art. XII).

Grounds for disqualification of a director 1. 2.

Conviction by final judgment of an offense punishable by imprisonment exceeding 6 years; Violation of the Corporation Code committed within 5 years prior to his election or appointment (Sec. 27, CC).

Reason: The BOD/ governing body performs specific duties as a “body”. Unlike corporate officers, each member of the BOD/ governing body has no individual power or authority to perform management functions (De Leon, supra, pg. 319).

NOTE: Disqualification by reason of violation of the Corporation Code does not require conviction for the reason that the decision of the SEC is final and executory unless appealed in CA and a TRO is obtained.

ELECTIONS

Q: John Gokongwei Jr., as stockholder of San Miguel Corporation, filed with SEC a petition for declaration of nullity of amended by-laws against the majority of the members of the Board of Directors and San Miguel Corporation. Among others, it was claimed that prior to the questioned amendment, Gokongwei had all the qualifications to be a director of the corporation, being a substantial stockholder thereof, that as a stockholder, Gokongwei had acquired rights inherent in stock ownership, such as the rights to vote and to be voted upon in the election of directors, and that in amending the by-laws, Soriano, et. al. purposely provided for Gokongwei's disqualification and deprived him of his vested right as afore-mentioned, hence the amended by-laws are null and void. Is a provision on the by-law disqualifying a person for a position in the board of directors on the ground that he is engaged in a business which competes with that of the Corporation valid?

Requirements for the election of directors in a stock corporation 1.

2. 3.

4.

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Stockholders, representing a majority of the outstanding capital stock of the corporation must be present, either in person or by a representative authorized to act by written proxy, The election must be by ballot, if requested by any voting stockholder or member. The total number of votes cast by him must 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: No delinquent stock shall vote or be voted for.

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Limitations on the election of directors/ trustees 1.

2. 3.

4. 5.

directors to be elected multiplied by the number of his shares shall equal.

At a meeting of stockholders or members called for the election of directors or trustees, there must be present either in person or by representative authorized to act by written proxy, the owners of the majority of the outstanding capital stock or majority of the members entitled to vote. The election must be by ballot if requested; A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to use any of the methods of voting in the election of directors; No delinquent stock shall be voted; The candidates receiving the highest number of votes shall be declared elected (Sec. 24, CC).

3. Cumulative voting by distribution – a stockholder may cumulate his shares by multiplying the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. NOTE: Cumulative voting in case of non-stock corporations only if it is provided in the AOI. The members of non-stock corporations may cast as many votes as there are trustees to be elected but may cast not more than one vote for one candidate.

QUORUM Quorum required corporation

Permanent representation is not allowed in the BOD The board of directors of corporations must be elected from among the stockholders or members directors every year. Estoppel does not set in to legitimize what is wrongful (Grace Christian High School v. CA, G.R. No. 108905, Oct. 23, 1997).

a

stock

or

non-stock

Unless otherwise provided for in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock entitled to vote or a majority of the members in the case of non-stock corporations (Sec. 52,CC).

Jurisdiction over election contests in stock and non-stock corporations

REMOVAL Power to remove directors or trustees

As amended by R.A. 8799 (The Securities Regulation Code), the jurisdiction of the SEC under Sec. 5 P.D. No. 902‐A (SEC Reorganization Act) is now transferred to Courts of General Jurisdiction (Regional Trial Court). Thus, RTC now has jurisdiction over election contest.

The power to remove belongs to the stockholders exclusively (Sec. 28, CC). GR: Removal may be with or without cause XPN: If the director was elected by the minority, there must be cause for removal because the minority may not be deprived of the right to representation to which they may be entitled under Sec. 24 of the Code (Sec. 28, CC).

Q: In case where there are 2 lists of BOD submitted to SEC, which one is controlling? A: It is the list of directors in the latest general information sheet as filed with the SEC which is controlling (Premium Marble Resources, Inc. v. CA, G.R. No. 96551, Nov. 4, 1996).

Requisites for removal of directors or trustees 1.

CUMULATIVE VOTING/ STRAIGHT VOTING Different methods of voting

2.

1. Straight voting – every stockholder may vote such number of shares for as many persons as there are directors to be elected.

3.

It must take place either at a regular meeting or special meeting of the stockholders or members called for the purpose; Previous notice to the stockholders or members of the intention to remove a director; A vote of the stockholders representing 2/3 of outstanding capital stock or 2/3 of members.

Q: In 1999, Corporation A passed a board resolution removing X from his position as manager of said corporation. The by‐laws of A corporation provide that the officers are the president, vice‐president, treasurer and secretary. Upon complaint filed with

3. Cumulative voting for one candidate – a stockholder is allowed to concentrate his votes and give one candidate, as many votes as the number of

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

in

194

CORPORATION CODE the SEC, it held that a manager could be removed by mere resolution of the board of directors. On motion for reconsideration, X alleged that he could only be removed by the affirmative vote of the stockholders representing 2/3 of the outstanding capital stock. Is X's contention legally tenable. Why? (2001 Bar Question)

Filling-up a vacancy caused by resignation of a director in a hold-over position The vacancy caused by resignation of a director in a hold-over position can only be filled up by the stockholders or members, for the cause of vacancy is not resignation but by expiration of term because the hold-over period is not a part of the director’s original term of office, nor is it a new term (De Leon, supra, pg. 295-296).

A: No. Stockholders' approval is necessary only for the removal of the members of the Board. For the removal of a corporate officer or employee, the vote of the Board of Directors is sufficient for the purpose.

Q: During the Annual Stockholders’ Meeting of Valle Verde Country Club, Inc. (VVCC), Jaime Dinglasan, et al., were elected as new members of the board of directors. In the succeeding years however, the requisite quorum for the holding of the stockholders’ meeting could not be obtained. Consequently, Dinglasan, et al., continued to serve in the VVCC Board in a hold-over capacity. Subsequently, Dinglasan resigned from his position as member of the VVCC Board. In a meeting, the remaining directors, still constituting a quorum of VVCC’s nine-member board, elected Eric Roxas to fill in the vacancy created by the resignation of Dinglasan. A year later, Eduardo Makalintal also resigned as member of the VVCC Board. He was replaced by Jose Ramirez, who was elected by the remaining members of the VVCC Board. Victor Africa, a member of VVCC, questioned the election of Roxas and Ramirez as members of the VVCC Board with the SEC and the RTC. May the remaining directors of the corporation’s Board, still constituting a quorum, elect another director to fill in a vacancy caused by the resignation of a hold-over director?

FILLING OF VACANCIES Ways of filling up the vacancies in the board 1. Vacancies filled up by stockholders or members: (ERORI) a. Expiration of term; b. Removal; c. Grounds Other than removal or expiration of term, where the remaining directors do not constitute a quorum for the purpose of filling the vacancy; d. If the vacancy may be filled by the remaining directors or trustees but the board Refers the matter to stockholders or members; or e. Increase in the number of directors results to vacancy. 2. Vacancies filled up by members of the board -If still constituting a quorum, at least a majority of the members are empowered to fill any vacancy occurring in the board other than by removal by the stockholders or members or by expiration of term (Sec. 29, CC).

A: No. The remaining directors of the corporation’s Board, even if still constituting a quorum, cannot elect another director to fill in a vacancy caused by the resignation of a hold-over director. The Section 23 of the Corporation Code means that the term of the members of the board of directors shall be only for one year; their term expires one year after election to the office. The holdover period – that time from the lapse of one year from a member’s election to the Board and until his successor’s election and qualification – is not part of the director’s original term of office, nor is it a new term; the holdover period, however, constitutes part of his tenure. Corollary, when an incumbent member of the board of directors continues to serve in a holdover capacity, it implies that the office has a fixed term, which has expired, and the incumbent is holding the succeeding term. With the expiration of Makalintal’s term of office, a vacancy resulted which, by the terms of Section 29 of the Corporation Code,

NOTE: The phrase “may be filled” in Sec. 29 indicates that the filling of vacancies in the board by the remaining directors constituting a quorum is merely permissive. Corporations may choose how vacancies in their boards may be filled up, either by the remaining directors or trustees constituting a quorum or by all stockholders or members. However, if the by-laws prescribe the specific mode of filling up existing vacancies, the provisions of the by-laws should be followed (De Leon, supra, pg. 296).

Duration of the term of a replacement director A director elected to fill vacancy shall serve the unexpired term of the director he replaced (Sec. 29, CC).

195

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW must be filled by the stockholders of VVCC in a regular or special meeting called for the purpose. His resignation as a holdover director did not change the nature of the vacancy; the vacancy due to the expiration of Makalintal’s term had been created long before his resignation (Valle Verde Country Club, Inc., et al., v. Victor Africa, G.R. No. 151969, September 4, 2009).

Compensation to the directors of a corporation without proper authorization in the by-laws or by the vote of the stockholders may be recovered in a stockholders’ suit (De Leon, supra, pg. 298).

COMPENSATION

A: No. Such officers, not being directors and having no control over the funds and property of the corporation, even though they may be stockholders, do not occupy the relation of trustees to the corporation (Ibid., pg. 301, citing Cheeney vs. Lafayette, BOR Co., 61 III. 570).

Q: Is the general rule that directors are not entitled to compensation applicable to corporate officers, who are not directors?

Compensation of directors GR: Directors, in their capacity as such, are not entitled to receive any compensation except for reasonable per diems.

Q: Ricardo T. Salas, et al., are the majority and controlling members of the Board of Trustees of Western Institute of Technology, Inc. (WIT), a stock corporation engaged in the operation of an educational institution. According to Homero Villasis, et al., the minority stockholders of WIT, a special board meeting was held whereby the the Board of Trustees passed resolution granting monthly compensation to Salas, et al., as corporate officers. Villasis, et al., filed an affidavit-complaint against Salas, et al., for falsification of a public document and estafa. After trial,, Salas, et al., were acquitted. Villasis, et al., would like to hold Salas, et al., civilly liable despite their acquittal in the criminal cases. They base their claim on the alleged illegal issuance by Salas, et al., of the resolution ordering the disbursement of corporate funds representing the retroactive compensation in favor of the board members of WIT. They maintain that this grant of compensation is proscribed under Section 30 of the Corporation Code. Is the resolution granting Salas, et al., compensation for services rendered as officers of WIT valid?

XPNs: 1. When their compensation is fixed in the by-laws. 2. When granted by the vote of stockholders representing at least a majority of the outstanding capital stock at a regular or special meeting 3. If they perform services other than as directors of the corporation (i.e. where directors are also corporate officers or employees of the corporation) (Sec. 30, CC). BOD is not prohibited from securing an insurance policy for the life of its members and making the directors the beneficiaries instead of the corporation The Insurance Code does not contain any prohibition as to such. However, the premium paid thereon is analogous to a continuing bonus and gift and thus falls within the context of additional compensation. A corporation may not be used by its officers or stockholders as a means of diverting profits or proceeds to the payment of premium on insurance policies to the enrichment of its beneficiaries at the expense of, or to the detriment of, its creditors (SEC Opinion, Dec. 8, 1987).

A: Yes. The resolution is valid. There is no argument that directors or trustees, as the case may be, are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office. This rule is founded upon a presumption that directors /trustees render service gratuitously and that the return upon their shares adequately furnishes the motives for service, without compensation. Under Section 30, there are only two (2) ways by which members of the board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2) when the stockholders representing a majority of the outstanding capital stock at a regular or special stockholders’ meeting agree to give it to them. This

Limitation on the amount of compensation to be received by the directors 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 (Sec. 30, CC). Remedy of the stockholders if there was no proper authorization for the grant of compensation to the directors

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

196

CORPORATION CODE proscription, however, against granting compensation to directors/trustees of a corporation is not a sweeping rule. Section 30 which states that the directors shall not receive any compensation, as such directors. The phrase “as such directors” is not without significance for it delimits the scope of the prohibition to compensation given to them for services performed purely in their capacity as directors or trustees. The unambiguous implication is that members of the board may receive compensation, in addition to reasonable per diems, when they render services to the corporation in a capacity other than as directors/trustees. In the case at bench, the resolution granted monthly compensation to Salas, et al., not in their capacity as members of the board, but rather as officers of the corporation, more particularly as Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of Technology (Western Institute of Technology, Inc., v. Ricardo T. Salas, et al., G.R. No. 113032, August 21, 1997).

Special Fact Doctrine The special fact doctrine is an exception to the majority rule doctrine. It states that where special circumstances or facts are present which make it inequitable for the director to withhold information from the stockholder, the duty to disclose arises, and concealment is fraud (ibid). Instances where the Special Fact Doctrine has been applied In foreign US jurisprudence, the special fact doctrine was applied in the following cases: 1. Where a director actively participation in the negotiations for a transfer of the corporate property (Strong v. Repide, 213 U.S. 419, 29 S.Ct. 521, 53 L.Ed. 853). 2. Where a director undertakes to speak or become active in inducing the sale, he must speak fully, frankly, and honestly, and conceal nothing to the disadvantage of the selling stockholder (Poole v. Camden, 79 W. Va. 310). 3. Where a director personally seeks a stockholder for the purpose of buying his shares without making disclosure of material facts within his peculiar knowledge and not within reach of the stockholders, the transaction will be closely scrutinized and relief may be granted in appropriate instances (Strong v. Repide, Ibid).

FIDUCIARY DUTIES AND LIABILITY RULES Nature of the obligation of the directors to the corporation The directors’ character is that of a fiduciary insofar as the corporation and the stockholders as a body are concerned. As agents entrusted with the management of the corporation for the collective benefit of the stockholders, they occupy a fiduciary relation, and in this sense the relation is one of trust.

Liability of the directors/ trustees or officers of a corporation for their official acts

The ordinary trust relationship of directors of a corporation and stockholders springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stockholders. Equity recognizes that stockholders are the proprietors of the corporate interests and are ultimately the only beneficiaries thereof (Gokongwei vs. SEC, supra).

GR: The officers of a corporation are not personally liable for their official acts. XPNs: If it is shown that they exceeded their authority. In the following instances, the directors/ trustees may be held personally liable for damages: 1. They willfully and knowingly vote for or assent to patently unlawful acts of the corporation; or 2. They are guilty of gross negligence or bad faith in directing the affairs of the corporation; or

Majority Rule Doctrine in the dealings of directors with stockholders

NOTE: Bad faith or negligence is a question of fact. Bad faith does not simply mean bad judgment or negligence. It imparts a dishonest purpose or some moral obliquity and conscious doing of wrong. It means breach of a known duty through some motive or interest or ill-will; it partakes of the nature of fraud (Ford Phils., Inc., et al. vs. CA, GR 99039, Feb. 3, 1997).

The majority rule, states that a director has a fiduciary duty with respect to the corporation as an entity, and not to the stockholders as individuals. Consequently, he is subject to the duty to disclose all material facts only to the corporation and not to the stockholders (American T. Co. v. California etc. Ins. Co. , 15 Cal.2d 42, 1940).

3.

197

They acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees (Sec. 31, CC); or

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW 4.

5.

6.

When they consent to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto (Sec. 65, CC); or When they are made, by a specific provision of law, to personally answer for their corporate action (Sec. 144, CC; Sec.13, PD 115; Uichico vs. NLRC, GR 121434, June 2, 1997); or When they agree to hold themselves personally and solidarily liable with the corporation (Tramat Mercantile, Inc. vs. CA 238 SCRA 14 [1994]).

A: No. Basic is the rule that a corporation has a separate and distinct personality apart from its directors, officers, or owners. In exceptional cases, courts find it proper to breach this corporate personality in order to make directors, officers, or owners solidarily liable for the companies’ acts. Section 31 of the Corporation Code provides for the basis of the liability of directors, trustees or officers. Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the debts of the corporation. The governing law on personal liability of directors for debts of the corporation is still Section 31 of the Corporation Code. In the present case, there is no evidence to indicate that Manuel D. Dasig, as president and general manager of Alert Security, is using the veil of corporate fiction to defeat public convenience, justify wrong, protect fraud, or defend crime (Alert Security and Investigation Agency, Inc., et al., Saidali Pasawilan, G.R. No. 182397, September 14, 2011)

NOTE: When the officers of the corporation exceeded their authority, their actions are not binding upon the corporation unless ratified by the corporation or is estopped from disclaiming them (Reyes v. RCPI Credit Employees Union, G.R. No. 146535, Aug. 18, 2006).

Liability of a director for termination of employees Without any evidence of bad faith or malice, directors may not be held personally liable. Only when the termination is done with malice or in bad faith on the part of the director may the director be held solidarily liable with the corporation (Equitable Banking Corporation vs. NLRC, GR No. 02467, June 13, 1997).

Liability of directors for the issuance of watered stocks Any director or officer of a corporation consenting to the issuance of stocks for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary, shall be solidarily, liable with the stockholder concerned to the corporation and its creditors for the difference between the fair value received at the time of issuance of the stock and the par or issued value of the same (Sec. 65, CC).

Q: Saidali Pasawilan, et al., were all employed by petitioner Alert Security as security guards. They were assigned at DOST pursuant to a security service contract between the DOST and Alert Security. Pasawilan, et al., aver that because they were underpaid, they filed a complaint for money claims against Alert Security and its president and general manager, Manuel D. Dasig. As a result of their complaint, they were relieved from their posts in the DOST and were not given new assignments despite the lapse of six months. Thus, they filed a joint complaint for illegal dismissal against petitioners. Alert Security and Dasig on the other hand, deny that they dismissed Pasawilan, et al. They claimed that from the DOST, Pasawilan, et al., were merely detailed at the Metro Rail Transit, Inc. at Light Rail Transit Authority (LRTA) Compound in Aurora Blvd. Pasawilan, et al., however, failed to report at the LRTA and instead kept loitering at the DOST and tried to convince other security guards to file complaints against Alert Security. The NLRC ruled that there was no sufficient basis to rule that Pasawilan, et al., were terminated from their employment. The CA reversed and ruled that Pasawilan, et al., should be paid their monetary awards in solidum by Alert Security and Manuel D. Dasig, its President and General Manager. Is Manuel Dasig, the president and general manager of Alert Security solidarily liable with Alert Security for the payment of the money awards in Pasawilan, et al.? UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Liability of the director, trustee or officer who attempts to acquire or acquires any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence When a director, trustee, or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which otherwise would have accrued to the corporation (Sec. 31, CC). NOTE: Private or secret profits obtained must be accounted for, even though the transaction on which they are made is advantageous or is not harmful to the corporation, or even though the director/ trustee or officer acted without intent to injure the corporation.

198

CORPORATION CODE Q: Is the above rule changed by the fact that the agreement whereby the director/ trustee or officer is to receive a secret profit is made prior to the time he becomes as such director/ trustee or officer?

3.

A: No. Even though the agreement to receive a secret profit is made prior to the time the recipient becomes a director/ trustee or officer, he is still liable under the above rule (De Leon, supra, pg. 307). Q: Is the above rule changed by the fact that the secret profits were obtained from ultra vires transactions?

When the property or business opportunity has ceased to be a “corporate opportunity” and has transformed into a “personal opportunity”. In such a case the corporation is definitely no longer able to avail itself of the opportunity, which may “arise from financial insolvency”, or from legal restrictions, or from any other factor which prevents it from acting upon the opportunity for its own advantage (SEC Opinion, March 4, 1982).

Q: Malyn, Schiera and Jaz are the directors of Patio Investments, a close corporation formed to run the Patio Cafe, an al fresco coffee shop in Makati City. In 2000, Patio Cafe began experiencing financial reverses, consequently, some of the checks it issued to its beverage distributors and employees bounced.

A: No. Notwithstanding the fact that the profits were derived from transaction ultra vires, the director/ trustee or officer is still liable (ibid). Doctrine of Corporate Opportunity

In October 2003, Schiera informed Malyn that she found a location for a second cafe in Taguig City. Malyn objected because of the dire financial condition of the corporation.

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 (Sec. 34, CC).

Sometime in April 2004, Malyn learned about Fort Patio Cafe located in Taguig City and that its development was undertaken by a new corporation known as Fort Patio, Inc., whereboth Schiera and Jaz are directors. Malyn also found that Schiera and Jaz, on behalf of Patio Investments, had obtained a loan of P500, 000.00, from PBCom Bank, for the purpose of opening Fort Patio Cafe. This loan was secured by the assets of Patio Investments and personally guaranteed by Schiera and Jaz.

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 (ibid). NOTE: The rule shall be applied notwithstanding the fact that the director risked his own funds in the venture (ibid).

Malyn then filed a corporate derivative action before the Regional Trial Court of Makati City against Schiera and Jaz, alleging that the two directors had breached their fiduciary duties by misappropriating money and assets of Patio Investments in the operation of Fort Patio Cafe.

However, if such act is ratified by a vote of the stockholders representing at least 2/3 of the outstanding capital stock, the director is excused from remitting the profit realized (ibid).

Non-applicability of the Doctrine of Corporate Opportunity

Did Schiera and Jaz violate the principle of corporate opportunity? Explain. (2005 Bar Question)

The doctrine is not applicable to the following instances: 1. When a director engages in a distinct enterprise of the same general class of business as that which his corporation is engaged in, so long as he acts in good faith. 2. The opportunity is one which is not essential to the corporation’s business, or employment of company’s resources, or where the director or officer embracing opportunity personally is not brought into direct competition with the corporation.

A: Yes, Shciera and Jaz violated the Principle of Corporate Opportunity, because they used Patio Investments to obtain a loan, mortgaged its assets and used the proceeds of the loan to acquire a coffee shop through a corporation they formed (Sec. 34, CC). RESPONSIBILITY FOR CRIMES Where a law requires a corporation to do a particular act, failure of which on the part of the responsible officer to do so constitutes an offense, the responsible officer is criminally liable therefore. The

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW reason is that a corporation can act through its officers and agents and where the business itself involves a violation of law all who participate in it are liable. While the corporation may be fined for such criminal offense if the law so provides, only the responsible corporate officer can be imprisoned (People vs. Tan Boon Kong, GR L-35262, March 15, 1930).

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 the case of an officer, the contract with the officer has been previously authorized by the board of directors (par. 1, Sec. 32,CC).

However, a director or officer can be held liable for a criminal offense only when there is a specific provision of law making a particular officer liable because being a corporate officer by itself is not enough to hold him criminally liable.

Contract entered with a director or trustee may be ratified by the vote of stockholders A contract of the corporation with one or more of its directors or trustees or officers may be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members in a meeting called for the purpose. However, the following should be concur: 1. Any of the first 2 conditions set forth in the 1st paragraph of Sec. 32, CC is absent; 2. Contract is with a director or trustee;

INSIDE INFORMATION Inside Information Any material non-public information about the issuer of the securities (corporation) or the security obtained by being an insider, which includes: (ID-ReGoL) 1. The Issuer; 2. A Director or officer (or any person performing similar functions) of, or a person controlling the issuer; 3. 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; 4. A GOvernment employee, 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 5. A person who Learns such information by a communication from any forgoing insiders (Sec. 3.8 SRC).

NOTE: If the contract is with an officer of the corporation, there must be a prior board resolution authorizing the same.

3.

4.

NOTE: Hence, in all such instances, the element that the contract is fair and reasonable cannot be dispensed with for the transaction is to be valid and enforceable.

Q: Suppose that the by-laws of X Corporation, a mining firm, provides that "The directors shall be relieved from all liability for any contract entered into by the corporation with any firm in which the directors may be interested." Thus, director A acquired claims which overlapped with X's claims and were necessary for the development and operation of X's mining properties. Is the by-law provision valid? Why? (2001 Bar Question)

CONTRACTS BY SELF-DEALING DIRECTORS WITH THE CORPORATION

A: No. It is in violation of Sec. 32 of the Corporation Code.

Dealings of directors, trustees or officers with the corporation

Q: What happens if director "A" is able to consummate his mining claims over and above that of the corporation's claims? (2001 Bar Question)

A contract of the corporation with one or more of its directors or trustees or officers is voidable, at the option of the corporation, unless all the following conditions are present: 1. That the presence of such director or trustee in the board meeting in which the contract was UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Full disclosure of the adverse interest of the directors or trustees involved is made at the stockholders’ meeting called for the purpose; The contract is fair and reasonable under the circumstances (par. 2, Sec. 32, CC).

A: "A" should account to the corporation for the profits which he realized from the transaction. He

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CORPORATION CODE grabbed the business corporation (Sec. 34, CC).

opportunity

from

of such by-law provision, the board of directors cannot simply create or appoint an executive committee to perform some of its functions (SEC Opinion, Sept. 27, 1993).

the

In such a case where there was an unauthorized creation of executive committee by the board, the principle of de facto officers may be applied insofar as third persons are concerned. However, insofar as the corporation is concerned, the unauthorized act of appointment of an executive committee may be subject to Sec. 144, which provides for penalties in violation of the Code (ibid).

BETWEEN CORPORATIONS WITH INTERLOCKING DIRECTORS Contracts between corporations with interlocking directors A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone. Provided that: 1. Contract is not fraudulent; 2. Contract is fair and reasonable under the circumstances; and 3. If the interest of the interlocking director in one corporation or corporations is merely nominal (not exceeding 20% of the outstanding capital stock), he shall be subject to the provisions of Sec. 32 insofar as the latter corporation or corporations are concerned (Sec. 33, CC).

Non-members of the board may be appointed as members of the executive committee Non-members of the board may be appointed as members of the executive committee provided that there are at least 3 members of the board who are members of the committee (SEC Opinion, Sept. 16, 1986). A person not a director can be a member of the executive committee but only in a recommendatory or advisory capacity. A foreigner is allowed to be a member of the executive committee

Substantial interest

A foreigner can be allowed representation in the executive committee since he can be allowed in the BOD. An Executive Committee is a governing body which functions as the board itself. Thus, membership therein shall be governed by the same law/ rules applicable to the BOD as provided in Sec. 35 (SEC Opinion, June 3, 1998).

Stockholdings exceeding 20% of the outstanding capital stock shall be considered substantial for purposes of interlocking directors (ibid). MANAGEMENT CONTRACTS Management contract A management contract is 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. A corporation under management is bound by the acts of the managing corporation and is estopped to deny its authority (National Bank vs. Producers’ Warehouse Association, 42 Phil. 609).

Executive committees provided in the Revised Code of Corporate Governance

EXECUTIVE COMMITTEE

The executive committee cannot act on the following: 1. Matters needing stockholder approval 2. Filling up of board vacancies 3. Amendment, repeal or adoption of by-laws 4. Amendment or repeal of any resolution of the Board which by its express terms is not amendable or repealable 5. Cash dividend declaration (Sec. 35, CC).

1. 2. 3.

Audit Committee Nomination Committee Compensation and Remuneration Committee

Limitations on the powers of the executive committee

Executive Committee An executive committee is a body created by the by-laws and composed of not less than three members of the board which, subject to the statutory limitations, has all the authority of the board to the extent provided in the board resolution or by-laws. The committee may act by a majority vote of all of its members (Sec. 35, CC).

Quorum required of the executive committee The quorum requirement for executive committee is the same as that of the BOD.

NOTE: An executive committee can only be created by virtue of a provision in the by-laws and that in the absence

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MERCANTILE LAW Decisions of the executive committee are not subject to appeal to the board

scheduled meeting.

Decisions of the executive committee are not subject to appeal to the board. However, if the resolution of the Executive Committee is invalid, i.e. not one of the powers conferred to it, it may be ratified by the board (SEC Opinion, July 29, 1995).

A director or trustee may waive this requirement, either expressly or impliedly. Meeting held in the absence of some of the directors and without any notice given to them is illegal

MEETINGS REGULAR OR SPECIAL

It is illegal, and the action at such meeting although by a majority of the directors, is invalid unless: 1. Subsequently ratified or waived, expressly or impliedly, by the absent directors or 2. Rights have been acquired by innocent third persons, as against whom the corporation must be held estopped to set up the failure to observe formalities (De Leon, supra, pg. 495).

Meetings of BOD/BOT i. DATE AND PLACE OF ii. REQUIRED WRITTEN MEETING /VERBAL NOTICE Regular Meeting Notice must: 1. State the date, time and place of 1. The date fixed in the meeting the by-laws; or 2. Be sent to every 2. If there is no date director or trustee in the by-laws – a. Within the shall be held period provided monthly in the by-laws b. In the absence Venue: of provision in 1. Venue fixed by the by-laws, at the by-laws; or least 1 day prior 2. If venue is not to the provided by the scheduled by-laws, meeting. anywhere in or outside of the A director or trustee may Philippines. waive this requirement, either expressly or impliedly. Special Meeting Notice must: 1. Any time upon 1. State the date, the call of the time and place of president; or the meeting 2. As provided in the 2. Be sent to every by-laws director or trustee Venue: a. Within the 1. Venue fixed by period the by-laws; or provided in the 2. If venue is not by-laws provided by the b. In the absence by-laws, of provision in anywhere in or the by-laws, at outside of the least 1 day Philippines. prior to the UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Directors or trustees cannot attend or vote by proxy at board meetings Directors or trustees cannot attend or vote by proxy at board meetings (Sec .25, CC). The members of the BOD are required to exercise their judgment and discretion in running the affairs of the corporation and they cannot be substituted by others (SEC Opinion, May 27, 1970). Requisites for a valid tele/ videoconferencing R.A. 8792, as implemented by SEC Memo. Circular No. 15, Nov 30, 2001, provides that: 1. Directors must express their intent on teleconferencing; 2. Proper identification of those attending; 3. The corporate secretary must safeguard the integrity of the meeting by recording it. There is no violation of the Anti-Wire Tapping Act (R.A. 4200) because all the parties to the board meeting are aware that all the communications are recorded. NOTE: The basic types of teleconferencing are: 1. Video conferencing; 2. Computer conferencing; 3. Audio conferencing.

Contents of the notice, which should be sent to every director in case of a tele/videoconferencing The Corporate Secretary shall send out the notices of the meeting to all directors in accordance with the manner of giving notice as stated in the corporate by-laws.

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CORPORATION CODE The notice shall include the following: 1. Inquiry on whether the director will attend physically or through tele/videoconferencing; 2. Contact number/s of the Secretary and office staff whom the director may call to notify and state whether he shall be physically present or attend through tele/videoconferencing; 3. Agenda of the meeting; 4. All documents to be discussed in the meeting, including attachments, shall be numbered and duly marked by the Secretary in such a way that all the directors, physically or electronically present, can easily follow, refer to the documents and participate in the meeting (SEC Memo Circ. No. 15, Series of 2001).

2. No board approval is necessary where there is custom, usage and practice in the corporation not requiring prior board approval or where subsequent approval is sufficient (Board of Liquidators v. Kalaw, G.R. No. L‐18805, Aug. 14, 1967). RULE ON ABSTENTION Effect of Abstention No inference can be drawn in a vote of abstention. When a director or trustee abstains, it cannot be said that he intended to acquiesce in the action taken by those who voted affirmatively. Neither, for that matter, can such inference be drawn from the abstention that he was abstaining because he was not then ready to make a decision (Lopez v Ercita, G.R. No. L-32991, June 29, 1972).

NOTE: If the director chooses tele/videoconferencing, he shall give notice of at least five days prior to the scheduled meeting to the Secretary. The latter shall be informed of his contact number/s. In the same way, the Secretary shall inform the director concerned of the contact number/s he will call to join the meeting. The Secretary shall keep the records of the details, and on the date of the scheduled meeting, confirm and NOTE such details as part of the minutes of the meeting (ibid).

Instances when a director is required to abstain in voting Whenever a director believes he/she has a conflict of interest, the director should abstain from voting on the issue and make sure his/her abstention is noted in the minutes (Robert's Rules, 10th ed., p 394). The other reason a director might abstain is that he/she believes there was insufficient information for making a decision. Otherwise, directors should cast votes on all issues put before them. Failure to do so could be deemed a breach of their fiduciary duties.

In the absence of an arrangement, it is presumed that the director will physically attend the Board meeting (ibid).

WHO PRESIDES The president shall preside at all meetings of the directors or trustees as well as of stockholders or members unless the by-laws provide otherwise (Sec. 54,CC).

Example where a director needs to abstain To avoid “Insider Trading”, Insiders are obligated to abstain from trading the shares of his corporation. This duty to abstain is based on two factors: 1. The existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone; 2. The inherent unfairness involved when a party takes advantage of such information knowing it is unavailable to those with whom he is dealing (SEC vs. Interport Resources Corporation, G.R. No. 135808, October 6, 2008).

QUORUM Quorum in board meetings GR: Majority of the number of directors or trustees. XPN: If AOI or the by-laws provide for a greater number (Sec. 25, CC). NOTE: The quorum is the same even if there is vacancy in the board.

Rule as to the decision of the quorum

STOCKHOLDERS AND MEMBERS

GR: Every decision of at least a majority of the directors or trustees present at a meeting at which there is quorum shall be valid as a corporate act (ibid).

A person becomes a shareholder the moment he: 1. Enters into a subscription contract with an existing corporation (he is a stockholder upon acceptance of the corporation of his offer to subscribe whether the consideration is fully paid or not); 2. Purchase treasury shares from the corporation; or

XPNs: 1. The election of officers which shall require the vote of a majority of all the members of the board (ibid).

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MERCANTILE LAW 3. Acquires shares from existing shareholders by sale or any other contract, or acquires shares by operation of law like succession (Sundiang, supra, 2009, pg. 227).

a day-to-day basis. As owners, though, the stockholders or members have residual powers over fundamental and major corporate changes. While stockholders and members (in some instances) are entitled to receive profits, the management and direction of the corporation are lodged with their representatives and agents -- the board of directors or trustees. In other words, acts of management pertain to the board; and those of ownership, to the stockholders or members. In the latter case, the board cannot act alone, but must seek approval of the stockholders or members (Tan vs. Sycip, August 17, 2006, GR 153468).

RIGHTS OF A STOCKHOLDER AND MEMBER 1. Management Right a. To attend and vote in person or by proxy at a stockholders’ meetings (Secs. 50, 58). b. To elect and remove directors (Secs. 24, 28). c. To approve certain corporate acts (Sec. 58) d. To adopt and amend or repeal the by-laws of adopt new by-laws (Secs. 46, 48). e.To compel the calling of the meetings(Sec. 50). f. To enter into a voting trust agreement (Sec. 59). g. To have the corporation voluntarily dissolved (Secs. 118, 119, CC). 2. Proprietary rights a. To transfer stock in the corporate book (Sec. 63). b. To receive dividends when declared (Sec. 43). c. To the issuance of certificate of stock or other evidence of stock ownership (Sec. 64). d. To participate in the distribution of corporate assets upon dissolution (Sec. 118, 119). e. To pre-emption in the issue of shares (Sec. 39, CC). 3. Remedial rights a. To inspect corporate books (Sec. 74, CC). b. To recover stock unlawfully sold for delinquent payment of subscription (Sec. 69, CC). c. To be furnished with most recent financial statements or reports of the corporation’s operation (Sec. 74, 75, CC). d. To bring suits (derivative suit, individual suit, and representative suit). e. To demand payment in the exercise of appraisal right (Secs. 41, 81, CC)

PROXY Proxy The term “proxy” designates the formal written authority given by the owner or holder of the stock, who has a right to vote it, or by a member, as principal, to another person, as agent, to exercise the voting rights of the former. It is also used to apply to the holder of the authority or person authorized by an absent stockholder or member to vote for him at a stockholders’ or members’ meeting. It also refers to the instrument which evidences the authority of the agent (De Leon, supra, pgs. 505-506). NOTE: A proxy is a special form of agency. A proxy holder is an agent and as such a fiduciary (ibid., pg. 506). Since a proxy acts for another, he may act as such although he himself is disqualified to vote his shares. A proxy-stockholder disqualified to vote because his stock has been declared delinquent may vote the stocks of his principal which is not delinquent.

Purposes of proxies

DOCTRINE OF EQUALITY OF SHARES

The purposes and use of proxies are as follows: 1. Assures the presence of a quorum in meetings of stockholders of large corporations; 2. Enables those who do not wish to attend a stockholders’/ members’ meeting to protect their interest by exercising their right to vote through a representative; and 3. One of the devices in securing voting control or management control in the corporation. (ibid.)

Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities (Sec. 6, CC). PARTICIPATION IN MANAGEMENT Under the Corporation Code, stockholders or members periodically elect the board of directors or trustees, who are charged with the management of the corporation. The board, in turn, periodically elects officers to carry out management functions on UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Who may be a proxy Any person whom the stockholder or member sees fit to represent him.

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CORPORATION CODE NOTE: By-laws restricting the stockholder’s or member’s right in this respect are void (De Leon, supra, pg. 507). Further, same person may act as proxy for one or several stockholders or members.

4. Voting by members in non-stock corps (par. 2, Sec. 89, CC) NOTE: In non-stock corporations the right to vote by proxy, or even the right to vote itself may be denied to members in the articles of incorporation or the by-laws as long as the denial is not discriminatory.

Duration of proxy

5. In considering other matters: 1. Pledge or mortgage of shares (par. 2, Sec. 55, CC). 2. In all other matters as may be provided in the by-laws (Sec. 47[4], CC). 3. In all meetings of stockholders or members (Sec. 58, CC).

1. Specific proxy – authority granted to the proxy holder to vote only for a particular meeting on a specific date. 2. Continuing proxy – grants authority to a proxy to appear and vote for and in behalf of a shareholder for a continuing period which should not be more than 5 years at any one time. By-laws may provide for a shorter duration of a continuing proxy.

Power to appoint a proxy is a personal right The right to vote is inseparable from the right of ownership of stock. The appointment of proxy is, therefore, purely personal and to be valid, a proxy to vote stock must have been given by the person who is the legal owner of the stock entitled to vote the same at the time it is be voted (SEC Opinion, Dec. 3, 1993, citing 5 Fletcher, Sec. 2053).

Extent of authority of a proxy 1. General proxy – A general discretionary power to attend and vote at an annual meeting, with all the powers the undersigned would possess if personally present, to vote for directors and all ordinary matters that may properly come before a regular meeting. NOTE: A holder of a general proxy has no authority to vote for a fundamental change in the corporate charter or other unusual transactions such as merger or consolidation.

Unless the stockholder or member who executed a proxy gives his consent in writing, a designated proxy may not further re-designate another under the same proxy. An alternate proxy can only act as proxy in case of non-attendance of the other designated proxy (De Leon, supra, pg. 508).

2. Limited proxy – Restrict the authority to vote to specified matters only and may direct the manner in which the vote shall be cast (ibid., pg. 510-511).

Revocation of proxy Requirements of a valid proxy A proxy may be revoked in writing, orally or by conduct.

1. Proxies shall be in writing and shall be signed by the stockholder or member concerned;

GR: One who has given a proxy the right to vote may revoke the same at anytime.

NOTE: Oral proxies are NOT valid.

2. The proxy shall be filed before the scheduled meeting with the corporate secretary; 3. Unless otherwise provided (continuing in nature) in the proxy, it shall be valid only for the meeting for which it is intended; and

XPN: Said proxy is coupled with interest, even if it may appear by its terms to be revocable (De Leon, supra, pg. 513). NOTE: Last proxy given revokes all previous proxies. (SEC Opinion, Oct. 14, 1991).

NOTE: The authority may be general or limited.

4. No proxy shall be valid and effective for a period longer than 5 years at any one time. (Sec.58, B.P. 68 as amended by Sec. 20, SRC)

SEC may pass upon the validity of the issuance and use of proxies

Instances when the right to vote by proxy may be exercised

PD 902-A empowers the SEC, among others, “to pass upon the validity of the issuance and use of proxies and voting trust agreements for absent stockholders or members” (Sec. 6[g]).

1. Election of the BOD/BOT (Sec. 24, CC) 2. Voting in case of joint ownership of stock (Sec. 56,CC) 3. Voting by trustee under VTA (Sec. 59, last par.)

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MERCANTILE LAW VOTING TRUST

6.

Voting trust agreement A voting trust agreement (VTA) is an agreement whereby one or more stockholders transfer their shares of stocks to a trustee, who thereby acquires for a period of time the voting rights (and/or any other specific rights) over such shares; and in return, trust certificates are given to the stockholder/s, which are transferable like stock certificates, subject, to the trust agreement.

7.

8. Purposes of a VTA

The trustee/s 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. No VTA shall be entered into for a period exceeding 5 years at any one time (i.e., for every voting trust) except in the case of a voting trust specifically requiring a longer period as a condition in a loan agreement, in which case, the period may exceed 5 years but shall automatically expire upon full payment of the loan. No VTA shall be entered into for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade. The agreement must not be used for purposes of fraud (Sec. 59, CC).

The following are the purposes of a VTA: 1. VTA makes possible a unified control of the affairs of the corporation and a consistent policy by binding stockholders to vote as a unit; 2. To assure continuity of policy and management especially of a new corporation desirous of attracting investors; 3. To enable the owners of the majority of the stock of the corporation to control the corporation; 4. To vest and retain the management of the corporation in the persons originally promoting it; 5. To prevent a rival concern from acquiring control of the corporation; 6. To carry out a proposed sale of the corporation’s assets and to facilitate its dissolution; 7. To enable two holding companies to operate jointly a corporation controlled by them; 8. To effect a plan for reorganization of a corporation in financial difficulty or in bankruptcy proceedings; and 9. To aid a financially embarrassed corporation to obtain a loan and protect its creditors (De Leon, supra, pg. 521-522).

9.

Procedural requirements and limitations imposed on VTA’s

Voting trust agreement v. Proxy

1. 2.

3. 4.

5.

Duration of a VTA 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 canceled and new certificates of stock shall be reissued in the name of the transferors (Sec. 59, CC). Effect of a voting trust agreement with respect to the rights of the trustor and the trustee It is the trustee of the shares who acquires legal title to the shares under the voting trust agreement and thus entitled to the right to vote and the right to be elected in the board of directors while the trustor-stockholder has the beneficial title which includes the right to receive dividends (Lee vs. CA, 205 SCRA 752, [1992]).

VOTING TRUST If validly executed, VTA is intended to be irrevocable for a definite and limited period of time. Trustee acquires legal title to the shares of the transferring stockholder Right to vote as well as other rights may be given except the right to receive dividends. The trustee may vote in person or by proxy unless the agreement

The agreement must be in writing and notarized and specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the SEC, otherwise, it is ineffective and unenforceable. The certificate/s of stock covered by the VTA shall be canceled. A new certificate shall be issued in the name of the trustee/s stating that they are issued pursuant to the VTA. The transfer shall be Noted in the books of the corporation, that it is made pursuant to said VTA.

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PROXY A proxy, unless coupled with interest, is revocable at anytime. Proxy has no legal title to the shares of the principal Only right to vote is given. The proxy must vote in person.

CORPORATION CODE provides otherwise The agreement must be notarized Trustee is not limited to act at any particular meeting The stock certificate shall be cancelled and a new one in the name of the trustee shall be issued stating that they are issued pursuant to a VTA. A trustee can vote and exercise all the rights of the stockholder even when the latter is present. An agreement must not exceed 5 years at any one time except when the same is made a condition of a loan. Governed by the law on trust A trustee has the right to inspect corporate books.

Validity of pooling agreements Proxy need not be notarized Proxy can only act at a specified stockholder’s meeting (if not continuing)

Pooling agreements are valid as long as they do not limit the discretion of the BOD in the management of corporate affairs or work any fraud against stockholders not party to the contract. Pooling agreement v. Voting Trust Agreement

No cancellation of the certificate shall be made

In Pooling Agreement, the stockholders themselves exercise their right to vote. On the other hand, the trustees are the ones who exercise the right to vote under the Voting Trust Agreement.

A proxy can only vote in the absence of the owner of the stocks

Q: A distressed corporation executed a VTA for a period of three years over 60% of its outstanding paid up shares in favor of a bank to whom it was indebted, with the Bank named as trustee. Additionally, the Company mortgaged all its properties to the Bank. Because of the insolvency of the Company, the Bank foreclosed the mortgaged properties, and as the highest bidder, acquired said properties and assets of the Company.

A proxy is usually of shorter duration although under Sec. 58 it cannot exceed 5 years at any one time Governed by the law on agency A proxy does not have a right of inspection of corporate books.

The three-year period prescribed in the Voting Trust Agreement having expired, the company demanded the turn-over and transfer of all its assets and properties, including the management and operation of the Company, claiming that under the Voting Trust Agreement, the Bank was constituted as trustee of the management and operations of the Company. (1992 Bar Question)

Pooling agreement This is an agreement, also known as voting agreement, entered into by and between 2 or more stockholders to make their shares as one unit (ex: Shareholders, A,B,C,D,E, holds 50% of the outstanding capital stock, entered into a pooling agreement to vote for F as a member of the board of director). This usually relates to election of directors where parties often provide for arbitration in case of disagreement. This does not involve a transfer of stocks but is merely a private agreement (Sec. 100, CC).

A: The demand of the company does not tally with the concept of a VTA. The VTA merely conveys to the trustee the right to vote the shares of grantor/s. The consequence of foreclosure of the mortgaged properties would be alien to the VTA and its effects.

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MERCANTILE LAW CASES WHEN STOCKHOLDERS’ ACTION IS REQUIRED Corporate powers exercised jointly by the BOD and stockholders CORPORATE ACT 1. Amendments, repeal, or adoption of new by-laws

2. Entering into management contr act

VOTE REQUIREMENT BOARD OF DIRECTORS STOCKHOLDERS Majority vote of the BOD GR: Majority vote of the outstanding capital stock XPN: If delegated by the stockholders to the board Majority of the quorum of GR: Vote of the majority of the the BOD outstanding shares of stock or members of both the managing and the managed corporation. XPN: The vote required for the managed corporation is not merely majority but 2/3 of the outstanding capital stock in cases where: 1.

A stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or

2.

3. Issuance of stock dividends 4. Amendment to articles of incorporation 5. Grant of compensation to directors 6.Extending or shortening the corporate term 7. Increase or decrease of capital stock 8. To incur, create, or increase bonded indebtedness 9. Investment of corporate funds in another corporation or business or for any other purpose other than the primary purpose 10. The sale or other disposition of all or substantially all of the corporate assets

Majority of the quorum of the BOD Majority vote of the BOD Approval of the Board Majority vote of the BOD Majority vote of the BOD Majority vote of the BOD Majority vote of the BOD

Approval of the board

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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. Vote representing 2/3 of the outstanding capital stock Vote representing 2/3 of the outstanding capital stock Majority vote of the outstanding capital stock Vote representing 2/3 of the outstanding capital stock Vote representing 2/3 of the outstanding capital stock Vote representing 2/3 of the outstanding capital stock Vote representing 2/3 of the outstanding capital stock

Vote representing 2/3 outstanding capital stock

of

the

CORPORATION CODE 11. Merger or consolidation

Majority vote of the BOD

12. Voluntary dissolution

Majority vote of the BOD

13. To adopt a plan of distribution of assets of a non-stock corporation

Majority vote of the Trustees

Vote representing 2/3 of the outstanding capital stock Vote representing 2/3 of the outstanding capital stock 2/3 of the members having voting rights

Corporate powers exercised solely by the stockholders CORPORATE ACT 1. Election of directors or trustees; filling up of vacancies by the stockholders due to the expiration of term, removal from office or increase in the number of board seats 2. To elect officers of the corporation 3. Fixing the issued price of no-par value shares

4. Declaration of cash and other dividends other than stock dividends 5. To adopt by laws 6. To revoke the power delegated to the BOD to amend or repeal the by-laws or adopt new by laws 7. To call a special meeting to remove directors or trustees 8. Removal of directors 9. Delegation of the power to amend by-laws to the board of directors 10. Ratification of corporate contract with a director 11. To delegate to the BOD the power to amend or repeal the by-laws or adopt new by laws

APPROVAL OF STOCKHOLDERS Candidates receiving the highest number of votes from the outstanding capital stock or members entitled to vote (plurality, NOT majority) Plurality vote of the BOD listed in the AOI, not merely those present constituting a quorum Majority of the quorum of the BOD if authorized by the AOI or in the absence of such authority, by a majority of the outstanding capital stock Majority of the quorum of the board Majority of the outstanding capital stock or of the members Majority of the outstanding capital stock or of the members Majority of the outstanding capital stock or of the members entitled to vote Vote representing 2/3 of the outstanding capital stock or of members entitled to vote Vote representing 2/3 of the outstanding capital stock Vote representing 2/3 of the outstanding capital stock 2/3 of the outstanding capital stock or of the members

PROPRIETARY RIGHTS Entitlement to receive dividends The following are the proprietary rights of the stockholders: 1. Right to Dividend 2. Right of First Refusal 3. Preemptive Right

GR: Those stockholders at the time of declaration are entitled to dividends (Sundiang, supra, 2009, pg. 211 citing SEC Opinion, July 15, 1994).

RIGHT TO DIVIDENDS

NOTE: Dividends declared before the transfer of shares belong to the transferor and those declared after the transfer belong to the transferee (ibid).

Right to dividend of a stockholder

XPNs: 1. In case a record date is provided for.

It is the right of the stockholder to demand payment of dividends after board declaration. Stockholders are entitled to dividends pro rata based on the total number of shares that they own and not on the amount paid for the shares (SEC Opinion, October 10, 1992 and July 16, 1996).

NOTE: A record date is the date fixed in the resolution declaring dividends, when the dividend shall be payable to those who are stockholders of record on a specified future date or as of the date of the meeting declaring said dividend (De Leon, supra, pg. 419, footnote no. 50.)

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MERCANTILE LAW 2. Holders of shares not fully paid which are not delinquent shall have all the rights of a stock holder. Rule in applying dividends in delinquent shares Cash

Stock

Limitations on the exercise of appraisal right 1. Any of the instances provided by law for the exercise of the right by a dissenting stockholder must be present (Secs. 81, 42, CC);

Cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus cost and expenses. Stock dividends are withheld from the delinquent stockholder until his unpaid subscription is fully paid.

2. The dissenting stockholder must have voted against the proposed corporate action (Sec. 82, CC); NOTE: The right is not available to a stockholder who was either absent at the meeting where the corporate action was approved, or was present at such meeting but abstained from casting his vote;

RIGHT TO APPRAISAL Appraisal right

3. A written demand on the corporation for payment of his shares must be made by him within 30 days after the date the vote was taken. (ibid.);

Appraisal right refers to the right of the stockholder to demand payment of the fair value of his shares, after dissenting from a proposed corporate action involving a fundamental change in the corporation in the cases provided by law (De Leon, supra, pg. 675).

NOTE: Failure to make the demand within such period shall be deemed a waiver of the appraisal right.

4. The price must be based on the fair value of the shares as of the day prior to the date on which the vote was take (ibid.);

Instances where a stockholder may exercise his appraisal right

NOTE: If the proposed corporate action is implemented or effected, the payment shall be made upon surrender of the certificate(s) of stock representing his shares.

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. 3. In case of merger or consolidation (Sec. 81, CC).

5. Such fair value must be determined as provided in Sec. 82 (ibid); NOTE: The fair value shall exclude any appreciation or depreciation in anticipation of such corporate action.

6. Payment of the shares must be made only out of the unrestricted earnings of the corporation (ibid); and 7. Upon such payment, the stockholder must transfer his shares to the corporation. (ibid.) Q: Assuming a stockholder disagrees with the issuance of new shares and the pricing for the shares, may the stockholder invoke his appraisal rights and demand payment for his shareholdings? (1999 Bar Question)

This appraisal right is likewise available to a dissenting stockholder in case the corporation decides to invest its funds in another corporation or business for any purpose other than its primary purpose as provided in Sec. 42 of the CC.

A: No, the stockholder may not exercise appraisal right because the matter that he dissented from is not one of those where right of appraisal is available under the Corporation Code.

Under Sec. 105, any stockholder of a close corporation may, for any reason, compel said corporation to purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock.

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Q: Philip Turner, et al., held 1,010,000 shares of stock of Lorenzo Co. Lorenzo Co. decided to amend its articles of incorporation to remove the stockholders’ pre-emptive rights to newly issued shares of stock. Turner, et al., voted against the amendment and demanded payment of their shares. The appraisal committee reported its

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CORPORATION CODE valuation of P2.54/share. Turner, et al., demanded payment based on the valuation of the appraisal committee, plus 2%/month penalty from the date of their original demand for payment, as well as the reimbursement of the amounts advanced as professional fees to the appraisers. Lorenzo Co. refused Turner, et al.’s demand, explaining that pursuant to the Corporation Code, the dissenting stockholders exercising their appraisal rights could be paid only when the corporation had unrestricted retained earnings to cover the fair value of the shares, but that it had no retained earnings at the time of the Turner, et al.’s demand. Is Lorenzo Co. obliged to pay the value of the shares of a dissenting stockholder even if at the time of demand, the corporation has no unrestricted retained earnings?

award, his voting and dividend rights shall be immediately restored until payment of his shares (Sec. 83, CC). NOTE: Even if his rights as stockholder are suspended after his demand in writing is made, he cannot be considered as an ordinary creditor of the corporation (SEC Opinion, Jan. 11, 1982).

3. But, upon payment of the stockholder’s shares, all his rights as stockholders are terminated, not merely suspended (Sec. 82, CC). 4. If before the stockholder is paid the proposed corporate action is abandoned is abandoned, his rights and status as a stockholder shall thereupon be permanently restored (Sec. 84, CC). Rule if there is a disagreement between the withdrawing stockholder and the corporation as to the fair value of the shares

A: No. The corporation need not pay the value of the shares of a dissenting stockholder if at the time of the demand, the corporation has no unrestricted retained earnings. No payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover the payment. The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment of the shares of stocks of the withdrawing stockholders. In this case Lorenzo Co. had indisputably no unrestricted retained earnings in its books at the time Turner, et al., commenced the complaint. This proved that Lorenzo Co.’s legal obligation to pay the value of Turner, et al.’s shares did not yet arise. The fact that the Corporation subsequent to the demand for payment and during the pendency of the collection case posted surplus profit did not cure the prematurity of the cause of action (Philip Turner, et al., v. Lorenzo Shipping Corporation, G.R. No. 157479, November 24, 2010).

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 three (3) disinterested persons, one of whom shall be named by the 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 (Sec. 82, CC). Cost of appraisal The costs and expenses of appraisal shall be borne as follows: 1. By the corporation— a. Where the price which the corporation offered to pay the dissenting stockholder is lower than the fair value as determined by the appraisers named by them; b. Where an action is filed by the dissenting stockholder to recover such fair value and the refusal of the stockholder to receive payment is found by the court to be justified. 2. By the dissenting stockholder— a. Where the price offered by the corporation is approximately the same as the fair value ascertained by the appraisers; b. Where the same action is filed by the dissenting stockholder and his refusal to accept payment is found by the court to be unjustified (De Leon, supra, pg. 682, citing Sec. 85, CC).

Effects of the exercise of the right of appraisal 1.

Once the dissenting stockholder demands payment of the fair value of his shares: a. All rights accruing to such shares including voting and dividend rights shall be suspended; and b. He 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 him; c. GR: He is not allowed to withdraw his demand for payment of his shares XPN: Unless the corporation consents thereto.

2.

If the dissenting stockholder was not paid the value of his shares within 30 days after the

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MERCANTILE LAW Q: In case of disagreement between the corporation and a withdrawing stockholder who exercises his appraisal right regarding the fair value of his shares, a three-member group shall by majority vote resolve the issue with finality. May the wife of the withdrawing stockholder be named to the three member group? (2011 Bar Question)

its stock transfer agent, if one has been appointed by the corporation (ibid). Requirement in order for the minutes of the board meetings be given probative value

A: No, the wife of the withdrawing shareholder is not a disinterested person.

The minutes of board meetings should be signed by the corporate secretary. Without such signature, neither probative value nor credibility could be accorded such minutes (Union of Supervisors [RB]NATU vs. Sec. of Labor, 109 SCRA 139 [1981]).

Q: When does the right to payment cease?

Right to inspect

A: The right of the dissenting stockholder to be paid the fair value of his shares shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him if:

The right to inspect is the right of a stockholder to inspect the books of the corporation is subject to the following limitations: 1. The right must be exercised during reasonable hours on business days 2. The person demanding the right has not improperly used any information obtained through any previous examination of the books and records of the corporation 3. The demand is made in good faith or for legitimate purpose germane to his interest as a stockholder (Sec. 74, CC). 4. It should follow the formalities that may be required in the by-laws 5. The right does not extend to trade secrets 6. It is subject to limitations under special laws, e.g. Secrecy of Bank Deposits and FCDA or the Foreign Currency Deposits Act.

1. 2. 3. 4. 5.

Demand for payment is withdrawn with the consent of the corporation or The proposed corporate action is abandoned by the corporation or The proposed corporate action is rescinded by the corporation or The proposed corporate action is disapproved by the SEC where such approval is necessary or The SEC determines that the dissenting stockholder is not entitled to the appraisal right (Sec. 84, CC). RIGHT TO INSPECT

NOTE: The right extends, in compliance with equity, good faith, and fair dealing, to a foreign subsidiary wholly-owned by the corporation.

Books and records required to be kept by the corporation

However, this right does not apply where the corporation is not organized under the Philippine law as in such a case, the right of the stockholder is governed by the inspection requirements in the jurisdiction in which the corporation was organized (De Leon, supra, pg. 643).

The following are the books and records required to be kept by private corporations: 1. A record of all business transactions; 2. Minutes of all meetings of stockholders or members; 3. Minutes of all meetings of directors or trustees; and 4. Stock and transfer book, in case of stock corporations (Sec. 74, CC).

Rationale behind the right of inspection of a corporation The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property (Republic v Sandiganbayan, G.R. No. 88809, July 10, 1991).

NOTE: The duty to keep these books is imperative and mandatory. The stockholder can likewise inspect the financial statements of the corporation (Sec. 75, CC).

Place where the books and records shall be kept Persons entitled to inspect corporate books GR: All the above books and records must be kept at the principal office of the corporation (ibid).

The following are entitled to inspect the corporate books:

XPN: The stock and transfer book may be kept in the principal office of the corporation or in the office of UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE 1.

2.

3. 4.

Any director, trustee, or stockholder or member of the corporation at reasonable hours on business day (Sec. 74, CC). Voting trust certificate holder- The term “stockholder”, as used in Sec. 74 means not only a stockholder of record; it includes a voting trust certificate holder who has become merely an equitable owner of the shares transferred (Sec. 59, par. 3). Stockholder of a sequestered company (Republic vs. Sandiganbayan, supra). Beneficial owner of shares- pledgee, judgment debtor, buyer from record owner. This is provided that his interest is clearly established by evidence.

the books of the corporation. During such interim period, the heirs stand as the equitable owners of the stocks, the executor or administrator duly appointed by the court being vested with the legal title to the stock (Joselito Musni Puno v. Puno Enterprises, Inc., G.R. No. 177066, September 11, 2009). Remedies for enforcement of right to inspect 1. 2.

Action for mandamus or damages Civil and criminal liability

Liability of a corporate officer or agent in case he violates the stockholder’s right to inspection Any officer or agent of the corporation who shall refuse to allow any director, trustees, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be liable for by a fine of not less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court (Sec 75 and Sec 144, CC).

Q: Carlos L. Puno, who died was an incorporator of respondent Puno Enterprises, Inc. (Puno, Inc). Joselito Musni Puno, claiming to be an heir of Carlos L. Puno, initiated a complaint for specific performance against Puno, Inc. Joselito averred that he is the son of the deceased with the latter’s common-law wife, Amelia Puno. As surviving heir, he claimed entitlement to the rights and privileges of his late father as stockholder of Puno. Inc. The complaint thus prayed that Joselito be allowed to inspect its corporate book, and be given an accounting and all the profits pertaining to the shares of Puno. Puno, Inc. filed a motion to dismiss on the ground that Joselito did not have the legal personality to sue because his birth certificate names him as “Joselito Musni Muno.” Apropos, there was yet a need for a judicial declaration that “Joselito Musni Puno” and “Joselito Musni Muno” were one and the same. May an heir of a stockholder can automatically exercise the rights (inspection, accounting, dividends) pertaining to the deceased?

Requisites for existence of probable cause to file a criminal case of violation of a stockholder’s right to inspect corporate books 1. A director, etc. has made a prior demand in writing for a copy or excerpts from the corporation’s records or minutes; 2. Any officer or agent of the concerned corporation shall refuse to allow the said director, etc., to examine and copy said excerpts; 3. If such refusal is made pursuant to a resolution or order of the BOD’s the liability for such action shall be imposed upon the directors or trustees who voted such refusal; and 4. Where the officer or agent of the corporation sets up the defense that the person demanding to examine and copy excerpts from the records and minutes has improperly used any information secured through any prior examination of the same or was not acting in good faith or for a legitimate purpose in making his demand, the contrary must be shown or proved (De Leon, supra, pg. 643, citing Ang-Abaya vs. Ang, 573 SCRA 129 [2008]).

A: No. The stockholder’s right of inspection of the corporation’s books and records is based upon his ownership of shares in the corporation and the necessity for self-protection. After all, a shareholder has the right to be intelligently informed about corporate affairs. Such right rests upon the stockholder’s underlying ownership of the corporation’s assets and property. Similarly, only stockholders of record are entitled to receive dividends declared by the corporation, a right inherent in the ownership of the shares. Upon the death of a shareholder, the heirs do not automatically become stockholders of the corporation and acquire the rights and privileges of the deceased as shareholder of the corporation. The stocks must be distributed first to the heirs in estate proceedings, and the transfer of the stocks must be recorded in

PRE-EMPTIVE RIGHT Pre-emptive right

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MERCANTILE LAW It is the preferential right of shareholders to subscribe to all issues or disposition of shares of any class in proportion to their present shareholdings (Sec. 39, CC). Purpose of pre-emptive right

to the Corporation Code, each stockholder has the pre-emptive right to all issues of shares made by the corporation in proportion to the number of shares he holds on record in the corporation. Denial by the corporation deny pre-emptive right

To enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus.

The corporation can deny pre-emptive right if the articles of incorporation or amendment thereto denies such right. Instances when pre-emptive right is not available

Exercise of pre-emptive right 1. Shares to be issued to comply with laws requiring stock offering or minimum stock ownership by the public; 2. Shares 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; 3. Shares issued in payment of previously contracted debts; 4. In case the right is denied in the Articles of Incorporation; (Sec. 39, CC) 5. Waiver of the right by the stockholder.

Pre-emptive right must be exercised in accordance with the Articles of Incorporation or the By-Laws. When the Articles of Incorporation and the By-Laws are silent, the Board may fix a reasonable time within which the stockholders may exercise the right. Pre-emptive right on the re-issuance of treasury shares When a corporation reacquires its own shares which thereby become treasury shares, all shareholders are entitled to pre-emptive right when the corporation reissues or sells these treasury shares. The re-issuance of treasury shares is not among the exception provided by Sec. 39 when pre-emptive right does not exist.

Q: A special meeting of the Board of Directors of LIMPAN approved a resolution making a partial payment for the legal services of Gilda C. Lim in the handling of various cases on behalf of, or involving the corporation to be paid in equivalent value in shares of stock of the corporation. Patricia Lim Yu, a sister of the Lim filed a complaint against the members of the Board of Directors of LIMPAN who approved the resolution. In their answer, the Board of Directors and Lim asserted that Yu had no legal capacity to sue and that the issuance of the shares in LIM’s favor was bona fide and valid pursuant to law and LIMPAN’s By-Laws. In support of their ground that Yu had no legal capacity to sue, the Lim pointed out that she had previously filed a petition for guardianship praying for the issuance of letters of guardianship over Yu. The judge issued an order, enjoining Yu from entering into, or signing, contracts or documents on her behalf or on behalf of others. Is Yu capacitated to file the complaint before the SEC?

Transferability of pre-emptive right Pre-emptive right is transferable unless there is an express restriction in the AOI. Waiver of pre-emptive right by the stockholder The stockholder may waive his pre-emptive right either expressly or impliedly as when the stockholder fails to exercise his pre-emptive right after being notified and given an opportunity to avail of such right. Q: Suppose that X Corporation has already issued the 1000 originally authorized shares of the corporation so that its Board of Directors and stockholders wish to increase X's authorized capital stock. After complying with the requirements of the law on increase of capital stock, X issued an additional 1000 shares of the same value. Assume that stockholder A presently holds 200 out of the 1000 original shares. Would A have a pre-emptive right to 200 of the new issue of 1000 shares? Why?

A: Yes. Yu has the legal capacity. Simply put, the TRO allows Respondent Patricia Lim-Yu to act for herself and to enter into any contract on her own behalf. However, she cannot transact in representation of or for the benefit of her parents, brothers or sisters, or the Limpan Investment Corporation. Contrary to what Lim suggest, all that is prohibited is any action that will bind them. In short, she can act only on and in her own behalf, not that of petitioners or the Corporation. There appears to be a confusion on the nature of the suit initiated before

A: Yes, A would have a pre-emptive right to 200 of the new issue of 1000 shares. A is a stockholder of record holding 200 shares in X Corporation. According UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE the SEC. Lim describe it as a derivative suit, which has been defined as an action brought by minority shareholders in the name of the corporation to redress wrongs committed against it, for which the directors refuse to sue. If the suit filed by Yu was indeed derivative in character, then Yu may not have the capacity to sue. The reason is that she would be acting in representation of the corporation, an act which the TRO enjoins her from doing. However, that the suit of Yu cannot be characterized as derivative, because she was complaining only of the violation of her preemptive right under Section 39 of the Corporation Code. She was merely praying that she be allowed to subscribe to the additional issuances of stocks in proportion to her shareholdings to enable her to preserve her percentage of ownership in the corporation. She was therefore not acting for the benefit of the corporation. Quite the contrary, she was suing on her own behalf, out of a desire to protect and preserve her preemptive rights. Unquestionably, the TRO did not prevent her from pursuing that action (Gilda C. Lim, et al., v. Patricia Lim-Yu, in her capacity as a minority stockholder of Limpan Investment Corporation, G.R. No. 138343, February 19, 2001).

5. 6. 7.

8.

Increase or decrease of capital stock Merger or consolidation of the corporation with another corporation or other corporations Investment of corporate funds in another corporation or business in accordance with the corporation code Dissolution of the corporation (Sec 6, CC).

Treasury shares are not entitled to vote Treasury shares shall have no voting right as long as such shares remain in treasury. Rule in case of joint ownership of stock GR: 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. XPN: If 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 (Sec. 56, CC).

RIGHT TO VOTE Rule in case of pledged or mortgaged shares Exercise the right to vote GR: The pledgor or mortgagor shall have the right to attend and vote at meetings of stockholders even though their shares are pledged or mortgaged

The stockholders can exercise their right to vote through the election, replacement and removal of Board of Directors or Trustees and on other corporate acts which require stockholders’ approval.

XPN: The pledgee or mortgagee has the right to vote and attend meetings if he is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate books (Sec. 55, CC).

Conditions for the issuance of non-voting shares The issuance of non- voting shares is subject to the following conditions under Section 6 of the Corporation Code: 1. Only preferred or redeemable shares may be made non-voting shares; 2. There must remain other shares with full voting rights

RIGHT OF FIRST REFUSAL Right of first refusal A right that grants to the corporation or another stockholder the right to buy the shares of stock of another stockholder at a fixed price and only valid if made on reasonable terms and consideration.

Instances when non-voting shares are entitled to vote The non-voting shares may still vote in the following matters: 1. Amendment of the articles of incorporation 2. Adoption and amendment of by-laws 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

Right of first refusal is not a substantive right under the Corporation Code GR: The right of first refusal can only arise by means of a contractual stipulation, or when it is provided for in the AOI

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MERCANTILE LAW XPN: In the case of a close corporation where the right of first refusal is required to be a feature to be found in the AOI.

When the injury is suffered directly by an individual shareholder as to affect his proprietary rights, as when his right to vote is unlawfully withheld or his right to inspect corporate books arbitrarily denied, an action may be brought by the injured stockholder in his own name and for his own benefit against the corporation (Salonga, Private Corporations).

NOTE: When only the by-laws provide a right of first refusal without the corresponding provision in the AOI and not printed in the stock certificate, it is null and void. There is no authority to create property restrictions in by-laws provisions (Hodges v. Lezama, 62 O.G. 6823).

REPRESENTATIVE SUIT

AOI may validly grant a right of first refusal in favor of other stockholders

Representative suit A representative suit is one filed by the shareholder individually, or on behalf of a class of shareholders to which he or she belongs, for injury to his or her interest as a shareholder (Cua vs. Tan, GR 182008, Dec. 4, 2009).

The SEC, as a matter of policy, allows restrictions on transfer of shares in the AOI if the same is necessary and convenient to the attainment of the objective for which the company was incorporated, unless palpably unreasonable under the circumstances (SEC Opinion, Feb. 20, 1995).

It is proper where the wrong is done to a group of stockholders, as where preferred stockholders’ rights are violated, a class or representative suit will be proper for the protection of all stockholders belonging to the same group (ibid).

Pre-emptive right v. Right of first refusal. PRE-EMPTIVE RIGHT May be exercised even when there is no express provision of law Pertains to unsubscribed portion of the authorized capital stock. A right that may be claimed against the corporation. It includes treasury shares.

RIGHT OF FIRST REFUSAL Arises only by virtue of contractual stipulations but is also granted under the provisions on close corporation

Representative suit v. Derivative suit REPRESENTATIVE SUIT Initiated by the stockholder under his own name or on behalf of other stockholders Seeks vindication for injury to his or her interest as a shareholder

Exercisable against another stockholder of the corporation of his shares of stock

REMEDIAL RIGHTS Actions that the stockholders or members can bring 1. Derivative suit – one brought by one or more stockholders or members in the name and on behalf of the corporation to redress wrongs committed against it or to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue or are the ones to be sued or hold control of the corporation. 2. Individual suit – an action brought by a stockholder against the corporation for direct violation of his contractual rights. 3. Representative suit – one brought by a person in his own behalf and on behalf of all similarly situated.

Deals with individual stockholders or a class of stockholder’s rights

Seeks to recover for the benefit of the corporation and its whole body of shareholders when injury is caused to the corporation that may not otherwise be redressed because of failure of the corporation to act Deals with corporate rights (ibid.)

Remedies of representative suit and derivative suit are mutually exclusive The two actions are mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders (direct action) or the corporation (derivative action) (ibid.)

INDIVIDUAL SUIT

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

DERIVATIVE SUIT Initiated by the stockholder on behalf of the corporation

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CORPORATION CODE Allegation of tort can coexist with a derivative suit in the same petition A personal injury suffered by a stockholder cannot disqualify him from filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring directors (Goachan v Young, G.R. No. 131889, March 12, 2001).

DERIVATIVE SUIT Requisites for the existence of a derivative suit (SExAN) 1.

2.

3. 4.

He was a Stockholder or member at the time the acts or transactions subject of the action occurred and at the time the action was filed; He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to EXhaust all remedies available under the articles of incorporation, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires; No Appraisal rights are available for the act or acts complained of; and The suit is not a Nuisance or harassment suit (Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies, Cited in Anthony S. Yu, et al., vs. Joseph S. Yukayguan, et al., G.R. No. 177549, June 18, 2009).

Jurisdiction over a derivative suit A derivative suit is an intra-corporate controversy hence under the jurisdiction of the RTC acting special commercial court. Q: AA, a minority stockholder, filed a suit against BB, CC, DD, and EE, the holders of majority shares of MOP Corporation, for alleged misappropriation of corporate funds. The complaint averred, inter alia, that MOP Corporation is the corporation in whose behalf and for whose benefit the derivative suit is brought. In their capacity as members of the Board of Directors, the majority stockholders adopted a resolution authorizing MOP Corporation to withdraw the suit. Pursuant to said resolution, the corporate counsel filed a Motion to Dismiss in the name of the MOP Corporation. Should the motion be granted or denied? Reason briefly.

Rationale for a derivative suit Under the Corporation Code, where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. But an individual stockholder may be permitted to institute a derivative suit on behalf of the corporation in order to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the corporation (Hi-Yield Realty vs. CA, G.R. No. 168863, June 23, 2009).

A: It should not be denied. The requisites for a valid derivative suit exist in this case. First, AA was exempt from exhausting his remedies within the corporation and did not have a demand on the Board of Directors for the latter to sue. Here, such a demand would be futile, since the directors who comprise the majority (namely BB, CC, DD and EE are the ones guilty of the wrong complained of. Second, AA appears to be a stockholder at the time of the alleged misappropriation of corporate funds. Third, the suit is brought on behalf and for the benefit of MOP Corporation. In this connection, it was held in Commart (Phils.) Inc. v. SEC, G.R. No. 85318, June 3, 1991, that to grant to the corporation concerned the right of withdrawing or dismissing the suit, at the instance of the majority stockholders and directors who themselves are the persons alleged to have committed the breach of trust against the interests of the corporation would be to emasculate the right of the minority stockholders to seek redress for the corporation. Filing such action as a derivative suit even by a lone stockholder is one of the protections extended by law to minority stockholders against abuses of the majority.

Stockholder is not a real party in interest in a derivative suit The corporation is the real party-in-interest while the suing stockholder, on behalf of the corporation, is only a nominal party (Ibid). Time when a person must be a stockholder for him to be justified in filing a derivative suit He must be a stockholder at the time the cause of action accrued. If the cause of action is general and continuing, said person must be a stockholder at the time of filing of the suit and at the time the cause of action accrued.

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MERCANTILE LAW Q: Oscar and Rodrigo C. Reyes are two of the four children of the spouses Pedro and Anastacia Reyes. Pedro, Anastacia, Oscar, and Rodrigo each owned shares of stock of Zenith Insurance Corporation (Zenith), a domestic corporation established by their family. Pedro and Anastacia died. Pedro’s estate was judicially partitioned among his heirs, however, no similar settlement and partition appear to have been made with Anastacia’s estate, which included her shareholdings in Zenith. Zenith and Rodrigo filed a complaint with the SEC against Oscar. The complaint stated that it is a derivative suit initiated and filed by the complainant Rodrigo to obtain an accounting of the funds and assets of Zenith which are now or formerly in the control, custody, and/or possession of Oscar and to determine the shares of stock of deceased spouses Pedro and Anastacia Reyes that were arbitrarily and fraudulently appropriated by Oscar. Oscar denied the charge. Furthermore, Oscar claimed that the suit is not a bona fide derivative suit because the requisites therefor have not been complied with. Is the complaint filed by Rodrigo is a derivative suit?

Elections of Legaspi, however, found most of the proxy votes, at its face value, irregular, thus, questionable; and for lack of time to authenticate the same, Palanca, et al., adjourned the meeting for lack of quorum. Despite Palanca et al.'s insistence that no quorum was obtained during the annual meeting, Muer, et al., pushed through with the scheduled election and were elected as the new Board of Directors and officers of Legaspi. Subsequently, they submitted a General Information Sheet to the Securities and Exchange Commission (SEC) with the new set of officers. Palanca, et al., filed a complaint for the declaration of nullity of elections against Muer, et al., in a form of a derivative suit. Is the derivative suit proper? A: No. The derivative suit is not proper. The complaint for nullification of the election is a direct action by Palanca, et al., who were the members of the Board of Directors of the corporation before the election, against Muer, et al., who are the newly-elected Board of Directors. The cause of action devolves on Palanca, et al., not the condominium corporation, which did not have the right to vote. Hence the same is improper for derivative suit (Legaspi Towers 300, Inc., et al., v. Amelia P. Muer, et al., G.R. No. 170783, June 18, 2012).

A: No. The complaint filed by Rodrigo does not qualify as a derivative suit. First, Rodrigo is not a shareholder with respect to the shareholdings originally belonging to Anastacia; he only stands as a transferee-heir whose rights to the share are inchoate and unrecorded. Second, in order that a stockholder may show a right to sue on behalf of the corporation, he must allege with some particularity in his complaint that he has exhausted his remedies within the corporation by making a sufficient demand upon the directors or other officers for appropriate relief with the expressed intent to sue if relief is denied. Lastly, the Court finds no injury, actual or threatened, alleged to have been done to the corporation due to Oscar’s acts. If indeed he illegally and fraudulently transferred Anastacia’s shares in his own name, then the damage is not to the corporation but to his co-heirs; the wrongful transfer did not affect the capital stock or the assets of Zenith (Oscar C. Reyes v. RTC of Makati, Branch 142, et al., G.R. No. 165744 , August 11, 2008).

OBLIGATIONS OF A STOCKHOLDER The following are the obligations of the stockholder: 1. Liability to the corporation for unpaid subscription (Sec. 67-70) 2. Liability to the corporation for interest on unpaid subscription if so required by the by laws (Sec. 66) 3. Liability to the creditors of the corporation for unpaid subscription (Sec. 60) 4. Liability for watered stock (Sec. 65) 5. Liability for dividends unlawfully paid (Sec. 43) 6. Liability for failure to create corporation (Sec. 10) (Sundiang, 2014). MEETINGS REGULAR OR SPECIAL

Q: Pursuant to the by-laws of Legaspi Towers 300, Inc. (Legaspi), petitioners Lilia Marquinez Palanca, et al., the incumbent Board of Directors, fixed the annual meeting of the members of the condominium corporation and the election of the new Board of Directors. Out of a total number of 5,723 members who were entitled to vote, 1,358 were supposed to vote through their respective proxies and their votes were critical in determining the existence of a quorum. The Committee on UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Meeting of stockholders/members i. DATE AND PLACE OF MEETING

ii. REQUIRED WRITTEN NOTICE

Regular meeting

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1. Annually on date fixed in the by-laws; or

The notice of meetings shall be in writing, and the time and place thereof stated therein.

The notice shall be sent 2. If there is no date in the by-laws – any date in April as to the stockholder: determined by the board. 1. within the period provided in the by-laws Venue: In the city or municipality where the 2. in the absence of principal office is located, provision in the by-laws and if practicable in the – at least 2 weeks prior principal office of the to the meeting. corporation: Provided, that Metro Manila shall be considered a city or Notice may be waived, municipality. expressly or impliedly, by any stockholder or member. Special meeting The notice of meetings shall be in writing, and the time and place 1. Any time deemed thereof stated therein. necessary; or 2. As provided in the by-laws The notice shall be sent to the stockholder: Venue: In the city or 1. Within the period municipality where the provided in the by-laws principal office is located, and if practicable in the 2. If no provision in the by-laws – at least 1 week principal office of the corporation: Provided, that prior to the meeting Metro Manila shall be considered a city or Notice may be waived, municipality. expressly or impliedly, by any stockholder or member. Requirements for a valid meeting stockholders/members or the board 1. 2.

3.

whether

It must be held in the proper place; It must be held at the stated date and at the appointed time or at a reasonable time thereafter; It must be called by the proper person: a. The person or persons designated in the by-laws have authority to call stockholders’ or members’ meeting b. In the absence of such provision in the by-laws it may be called by a director or trustee or by an officer entrusted with the management of the corporation c. A stockholder or member may make the call on order of the SEC whenever for any

cause there is no person authorized to call a meeting 4. The special meeting for the removal of directors or trustees may be called by the secretary or by stockholder or member. a. There must be a previous notice b. There must be a quorum W Rules on meeting or voting which are applicable to certain kinds of shares i 1. Delinquent shares shall not be entitled to vote. 2. Treasury shares have no voting rights while they remain in the treasury (Sec. 57, CC). 3. Fractional shares shall not be entitled to vote. 4. Escrow shares shall not be entitled to vote before the fulfillment of the condition imposed thereon. 5. Unpaid shares, if not delinquent, are entitled to all the rights of a stockholder including the right to vote. 6. Sequestered sharesGR: The registered owner of the shares of a corporation, even if they are sequestered by the government through the PCGG, exercises the right and the privilege of voting on them. The PCGG as a mere conservator cannot, as a rule, exercise acts of dominion by voting these shares. XPN: Two-tiered test: The registered owner of sequestered shares may only be deprived of these voting rights, and the PCGG authorized to exercise the same, only if it is able to establish that: 1. There is prima facie evidence showing that the said shares are ill-gotten and thus belong to the State; and 2. there is an imminent danger of dissipation, thus necessitating the continued sequestration of the shares and authority to vote thereupon by the PCGG while the main issue is pending before the Sandiganbayan (Trans Middle East [Phils.] vs. Sandiganbayan, GR 172556, June 9, 2006). XPN to the XPN: The two-tiered test does not apply in cases involving funds of public character (public character exception). In such cases, the government is granted the authority to vote said shares, namely: 1. Where the government shares are taken over by private persons or entities who or

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MERCANTILE LAW which registered them in their own names; and 2. Where the capitalization of shares that were acquired with public funds somehow landed in private hands (Republic vs. Sandiganbayan, G.R. No. 107789, Apr. 30, 2003).

QUORUM GR: Shall consist of the stockholders representing majority of the outstanding capital stock or a majority of the actual and living members with voting rights, in the case of non-stock corporation (Tan v. Sycip, G.R. No. 153468, Aug. 17, 2006). XPNs: 1. A different quorum may be provided for in the by-laws; 2. The corporation code provides for certain resolutions that must be approved by at least 2/3 of the outstanding capital stock, in which case, majority of the outstanding capital stock is insufficient to constitute a quorum, presence of the stockholders representing 2/3 of the outstanding capital stock is necessary for such purpose.

7. Pledgor, mortgagor, or administrator shares (Sec. 55, CC)- pledgor or mortgagor has the right to attend and vote at meetings unless pledge or mortgagee is expressly given such right in writing, as recorded on the books. Executor, administrators, receivers, and other legal representatives may attend and vote in behalf of the stockholder or members without need of any written proxy. In Gochan v. Young, G.R. No. 131889, Mar. 12, 2001, it was held that heirs are not prohibited from representing the deceased with regard to shares of stock registered in the name of the latter, especially when no administrator has been appointed.

MINUTES OF THE MEETINGS The minutes are a brief statement not only of what transpired at a meeting, usually of stockholders/ members or directors/ trustees, but also at meeting of an executive committee.

8. Shares jointly owned (Sec. 56, CC.) – consent of all the co-owners is necessary, unless there is a written proxy signed by all the co-owners. If shares are owned in an “and/or” capacity by the holders thereof, any one of the joint owners can vote or appoint a proxy thereof.

The minutes are usually kept in a book especially designed for that purpose, but they may also be kept in the form of memoranda or in any other manner in which they can be identified as minutes of a meeting (People vs. Dumlao, GR 168918, March 2, 2009).

WHO CALLS THE MEETING The “call” for a meeting is exercised by the person who has the power to call the meeting.

To have probative value and credibility, the minutes must be signed by the corporate secretary, notwithstanding that the one taking the minutes was a mere clerk (Union of Supervisors [RB]-NATU vs. Sec. of Labor, 109 SCRA 139 [1981]).

The following persons may exercise the power to “call” for a meeting: 1. The person or persons designated in the by-laws to have the authority to call stockholders’/ members’ meeting; 2. In the absence of such provision in the by-laws, the director/trustee or officer entrusted with the management of the corporation unless otherwise provided by law; 3. A stockholder/ member may make the call on order of the SEC whenever for any cause, there is no person authorized to call a meeting (Sec. 50, last par., CC) or the officers authorized fail or refuse to call a meeting.

CAPITAL STRUCTURE SUBSCRIPTION AGREEMENTS Subscription contract It is a contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. It is considered as such notwithstanding the fact that the parties refer to it as purchase or some other contract (Sec. 60, CC).

NOTE: SEC may compel the officers of any corporation registered by it to call meetings of stockholders/members thereof under its supervision (Sec. 6[f] A, PD No. 902-A).

Nature of a subscription contract A subscription contract is indivisible. Consequently, where stocks were subscribed and part of the subscription contract price was not paid, the whole subscription shall be considered delinquent and not

4. Corporate Secretary or a stockholder/member for a special meeting intended for the removal of directors or trustees (Sec. 28, CC). UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE only the shares which correspond to the amount not paid.

period granted (SEC Rule BED No. 902-A-3, Sec.1; De Leon, The Corporation Code Annotated, 2010 ed.).

NOTE: This is called the Doctrine of Individuality (Indivisibility) of Subscription. A subscription is one entire and indivisible whole contract. It cannot be divided into portions (Sec. 64, CC).

Subscription v. Purchase SUBSCRIPTION May be made before or after incorporation Subscriber becomes a stockholder even if he has not fully paid the subscription Cannot be released from his subscription unless all stockholders agree thereto and no creditor is thereby prejudiced Corporate creditors may proceed against the subscriber for his unpaid subscription in case the assets of the corporation are not sufficient to pay their claims

PURCHASE May be made only after incorporation Buyer does not become a stockholder until the fulfillment of the terms of the sale and registration thereof in the books of the corporation The corporation may rescind or cancel the contract for non-fulfillment of the contract by the buyer

In purchase amounting to more than 500 pesos, the Statute of Frauds shall apply

Subscription price are considered assets of the corporation, hence, creditors may go after them

Purchase price does not become assets of the corporation unless fully paid

1. Pre-incorporation subscription – entered into before incorporation (Sec. 61, CC). 2. Post-incorporation subscription–entered into after incorporation (Sundiang, supra, 2009, pg. 227). Rules governing contracts

WARRANT

A privilege granted to a party to subscribe to a certain portion of the unissued capital stock of a corporation within a certain period and under the terms and conditions of the grant exercisable by the grantee at anytime within the

A type of security which entitles the holder the right to subscribe to a pre-determined number of unissued capital stock of a corporation (subscription warrant), or to purchase a pre-determined number of issued or existing

pre-incorporation

subscription

GR: A pre-incorporation subscription agreement is irrevocable for a period of six (6) months from the date of subscription. XPNs: 1. If all of the other subscribers consent to the revocation, 2. If 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.

Stock option v. Warrant STOCK OPTION

NOTE: A warrant is detachable if it may be sold, transferred or assigned to any person by the warrant holder separate from and independent of the corresponding beneficiary securities, or shares of stock or other securities of the issuer which form the basis of the entitlement in a warrant. It is non-detachable if it may not be sold etc. (SEC Rules, Sept. 15, 1993; De Leon, The Corporation Code Annotated, 2010 ed.)

Kinds of subscription contracts

Creditors may not proceed against the buyer for the unpaid price as there is no privity of contract between them

Not covered by the Statute of Frauds

shares in the future (covered warrant).

XPN to XPN: No pre-incorporation subscription may be revoked after the submission of the AOI to the Securities and Exchange Commission (Sec. 61, CC). Payment of a subscription contract cannot be condoned by a corporation A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release (PNB v Bitulok Sawmill Inc, G.R. Nos. L-24177-85, June 29, 1968).

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MERCANTILE LAW Stockholder is entitled to the rights pertaining to shares of stock subscribed although not fully paid

subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of the claims. This doctrine is the underlying principle in the procedure for the distribution of corporate capital only in three instances: 1) amendment of the articles of incorporation to reduce the authorized capital stock; 2.) purchase of redeemable shares by the corporation regardless od the existence of unrestricted retained earnings; and 3.) dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 of the Corporation Code on the power of the corporation to acquire its own shares and in Section 122 on the prohibition against the distribution of corporate assets and property unless the stringent requirements are complied with.

As long as the shares are not considered delinquent, stockholders are entitled to all rights granted to it whether or not the subscribed capital stocks are fully paid. Q: FLADC, which was owned by the Tius, encountered dire financial difficulties. It was heavily indebted to PNB for P190 million. Thus, the construction of the Masagana Citimall was threatened with stoppage and incompletion. To prevent foreclosure of the mortgage on the two lots where the mall was being built, the Tius invited the Ongs to invest in FLADC. Under the Pre-Subscription Agreement they entered into, the Ongs and the Tius agreed to maintain equal shareholdings in FLADC. Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock while the Tius committed to contribute to FLADC a four-storey building and two parcels of land respectively to cover their additional 549,800 stock subscription therein. The business harmony between the Ongs and the Tius in FLADC, however, was short-lived because the Tius, rescinded the Pre-Subscription Agreement. The Tius accused the Ongs of violation of the terms of their agreement. Because of this, the Tius filed a case at SEC, seeking confirmation of their rescission of the Pre-Subscription Agreement. The SEC granted the same. Could the Tius could legally rescind the Pre-Subscription Agreement?

CONSIDERATION FOR STOCKS Valid considerations in a subscription agreement 1. Actual cash paid to the corporation; 2. Property, tangible or intangible (i.e. patents or copyrights), the requisites are as follows: a. The property is actually received by the corporation b. The property is necessary or convenient for its use and lawful purposes c. It must be subject to a fair valuation equal to the par or issued value of the stock issued d. The valuation thereof shall initially be determined by the incorporators; and e. The valuation is subject to the approval by the SEC. 3. Labor or services actually rendered to the corporation 4. Prior corporate obligations or indebtedness 5. Amounts transferred from unrestricted retained earnings to stated capital (in case of declaration of stock dividends) 6. Outstanding shares in exchange for stocks in the event of reclassification or conversion (Sec. 6, CC).

A: No. When a subscriber assigned properties and infused capital to the corporation upon invitation of a majority stockholder and in exchange for shares of stocks under a pre-subscription agreement, the agreement cannot be rescinded since the subject matter of the contract was the unissued shares of the Corporation allocated to the subscriber. Since these were unissued shares, the Pre-Subscription Agreement was in fact a subscription contract as defined under Section 60, Title VII 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 the parties refer to it as a purchase or some other contract.” A subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter of the transaction is property owned by the corporation - its shares of stock. Thus, the subscription contract was one between the subscriber and the corporation and not between the stockholders. The trust fund doctrine provides that UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

NOTE: Promissory notes or future services are not valid considerations (ibid.)

Persons required to pay in full their subscription upon incorporation The following are required to pay their subscription in full upon incorporation: 1. Non‐resident foreign subscribers upon incorporation must pay in full their subscriptions unless their unpaid subscriptions are guaranteed by a surety bond or by an assumption by a resident stockholder through an affidavit of liability.

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CORPORATION CODE NOTE: Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting control of the corporation but also to the beneficial ownership of the corporation, it is therefore imperative that such requirement apply uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation.

2. In case of no‐par value shares, they are deemed fully paid and non‐assessable (Sec. 6, CC). NOTE: The issued price of no-par value shares may be fixed in the AOI or by the BOD pursuant to authority conferred upon it by the AOI 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 (Sec. 62,CC).

Under the Corporation Code, capital stock consists of all classes of shares issued to stockholders, that is, common shares as well as preferred shares, which may have different rights, privileges or restrictions as stated in the articles of incorporation. The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but disallows denial of the right to vote in specific corporate matters. Thus, common shares have the right to vote in the election of directors, while preferred shares may be denied such right. Nonetheless, preferred shares, even if denied the right to vote in the election of directors, are entitled to vote on certain corporate matters.

SHARES OF STOCK Shares of stock Stock or share of stock is one of the units into which the capital stock is divided. It represents the interest or right which the owner has— 1. In the management of the corporation in which he takes part through his right to vote (if voting rights are permitted for that class of stock by the AOI); 2. In a portion of the corporate earnings, if and when segregated in the form of dividends; and 3. Upon its dissolution land winding up, in the property and assets of the corporation remaining after the payment of corporate debts and liabilities to creditors (De Leon, supra, pg. 79, citing 11 Fletcher, pg. 18 [1971 ed.]).

Since a specific class of shares may have rights and privileges or restrictions different from the rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution must apply not only to shares with voting rights but also to shares without voting rights (This is because when only preferred shares without voting rights are issued, the requirement of full beneficial ownership will be used as the standard). Preferred shares, denied the right to vote in the election of directors are anyway still entitled to vote on the eight specific corporate matters under Sec, 6. Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture of common and preferred non-voting shares, at least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60 percent of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares. This uniform application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the constitutional command that the ownership and operation of public utilities shall be reserved exclusively to corporations at least 60 percent of whose capital is Filipino-owned.

Q: In order to comply with the 60% capital requirement for ownership by Filipinos of certain corporations, what does the term capital refer to? A. The term “capital” refers to shares with voting rights, as well as with full beneficial ownership, which must be owned and held by citizens of the Philippines (Gamboa v. Teves G.R. No. 176579, October 9, 2012). NOTE: This is precisely because the right to vote in the election of directors, coupled with full beneficial ownership of stocks, translates to effective control of a corporation (Gamboa v. Teves G.R. No. 176579, October 9, 2012).

Legal title without beneficial title of stocks is not sufficient to meet the ownership requirement Mere legal title is insufficient to meet the 60% Filipino-owned “capital” required in the Constitution. Full beneficial ownership of 60% of the outstanding capital stock, coupled with 60% of the voting rights, is required. The legal and beneficial ownership of 60% of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional mandate. Otherwise, the corporation is “considered as non-Philippine nationals. Full beneficial ownership of the stocks, coupled with appropriate voting rights, is essential” (Gamboa v. Teves G.R. No. 176579, October 9, 2012).

Applying uniformly the 60-40 ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities, as mandated by the Constitution. Moreover, such uniform application to each class of shares insures that the “controlling interest” in public utilities always lies in the hands of Filipino citizens. This addresses and extinguishes Pangilinan’s worry that foreigners, owning most of the non-voting shares, will exercise greater control over fundamental corporate matters requiring two-thirds or majority vote of all shareholders (Gamboa v. Teves G.R. No. 176579, October 9, 2012).

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MERCANTILE LAW NATURE OF STOCK

DEFINITION

Nature of stock

Watered stock

The ownership of share of stock confers no immediate legal right or title to any of the property of the corporation. Each share merely represents a distinct undivided share or interest in the common property of the corporation (De Leon, ibid., pg. 80, citing 18 Am. Jur. 2d 737).

A watered stock is a stock issued in exchange for cash, property, share, stock dividends, or services lesser than its par value or issued value (Sec. 65, CC). Watered Stocks include stocks: 1. Issued without consideration (bonus share) 2. Issued for a consideration other than cash, the fair valuation of which is less than its par or issued value; 3. Issued as stock dividend when there are no sufficient retained earnings to justify it; and 4. Issued as fully paid when the corporation has received a lesser sum of money than its par or issued value (discount share) (De Leon, supra, pg. 605-606).

The interest over the share is purely inchoate, or a mere expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations (ibid., citing Saw vs. CA, 195 SCRA 740 [1991]). Further, the stockholder’s interest in the corporate property is merely equitable or beneficial in nature; hence he cannot be said to be a co-owner of the corporate property (ibid., citing Stockholders of F. Guanzon & Sons , Inc. vs. Register of Deeds).

NOTE: Both par and no par value shares can be watered stocks.

Reason behind the prohibition on the issuance of watered stocks

Shares of stocks are personal property

It is to protect persons who may acquire stock and the creditors of the corporation particularly those who may become such on the faith of its outstanding capital stock being fully paid. The prohibition secures equality among subscribers and prevents discriminations against those who have paid in full the par or issued value of their shares (ibid., pg. 606).

Shares of stock are personal property. They are incorporeal in nature (Art. 417 and 2095 of the Civil Code). Share of stock does not constitute an indebtedness of the corporation to the shareholder

Not all exchanges of stocks worth less than their value are considered watered stock

They are in the nature of choses in action but are not in a strict sense. They do not constitute an indebtedness of the corporation to the shareholder and are therefore, not credits as to make the stockholder a creditor of the corporation (De Leon, supra, pg. 81). SUBSCRIPTION AGREEMENTS

The watered stocks refer only to original issue of stocks but not to a subsequent transfer of such stocks by the corporation, for then it would no longer be an “issue” but a sale thereof (De Leon, supra, pg. 607, citing Rochelle Roofing Co. vs. Burley, 115 NE 478).

*Please refer to page 197 for the extensive discussion of this topic.

Treasury shares are not subject to the prohibition on the issuance of watered stocks

CONSIDERATION FOR SHARES OF STOCK

Treasury shares are not original issuances. They are shares of stocks which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation, or through some other lawful means (Sec. 9, CC). Since they do not lose their status as issued shares, they cannot be treated as new issues when disposed of or reissued.

*Please refer to the previously discussed topic on Consideration for Stocks found on the previous page. WATERED STOCK

Limitation on the re-disposal of treasury shares Treasury shares may again be disposed of for a reasonable price fixed by the BOD. Since they are not UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE subject to the prohibition on the issuance of watered stock, they may be sold for less than their par or issued value as long as the price for re-disposal is reasonable.

TRUST FUND DOCTRINE FOR LIABILITY FOR WATERED STOCK Trust fund doctrine

The issuance of watered stock cannot be ratified by the stockholders

The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits, and which the corporation may not dissipate. The creditors may sue the stockholders directly for the latter’s unpaid subscription.

It is not merely ultra vires, but is illegal per se as it is a violation of Sec. 62, CC. LIABILITY OF DIRECTORS FOR WATERED STOCKS Liability of directors for watered stocks

There is a violation of the trust fund doctrine when stocks of the corporation are issued less than the par value

Any director or officer of a corporation shall be solidarily liable with stockholder concerned to the corporation and its creditors for difference between the fair value received at the time of the issuance of the stock and the par or issued value of the same, if: 1. He consents to the issuance of stocks for consideration less than its par or issued value; or 2. He consents to the issuance of stocks for a consideration in any form other than cash, valued in excess of its fair value; or 3. Who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary (Sec. 65, CC).

GR: The trust fund doctrine is violated where stocks are issued by the corporation for a consideration which is less than its par value. XPN: Trust fund doctrine is not violated in case treasury shares are reacquired and subsequently re-issued for a lesser consideration by the corporation. The only limitation for the reissuance of treasury shares is that their price must be reasonable. SITUS OF SHARES OF STOCK Situs of shares of stock

Basis for the solidary liability of directors consenting to the issuance of watered stock

Generally, the situs of shares of stock is the country where the corporation is domiciled (Wells Fargo Bank v CIR, G.R. No. L-46720, June 28, 1940).

The solidary liability of the directors emanates from the fiduciary character of the position of director or corporate officer.

Domicile of the corporation

Defenses that can be invoked in order that a director or an officer can escape liability for the issuance of watered stocks

The residence of the corporation is the place where the principal office of the corporation is located as stated in its AOI even though the corporation has closed its office therein and relocated to another place (Hyatt Elevators and Escalators Corp. vs. Goldstar Elevator Phils., Inc., supra.).

1. The director or officer did not consent and did not have knowledge in the issuance of the watered stock. 2. The director or officer objected to its issuance a. Objection must be directed to the issuance of the watered stocks b. In writing c. File the same with the corporate secretary d. Such objection must be done before the sale of stocks (Sec. 65, CC).

Exception to the situs of shares The exception is when the case involves property taxation. For that purpose, the situs of intangible property, such as shares of stocks, is at the domicile or residence of the owner. However, this exception admits of its own exceptions, i.e.— 1. When a nonresident alien has shares of stock in a domestic corporation, then the situs will be in the Philippines. 2. For purposes of the estate tax, the gross estate of a resident decedent, whether citizen or alien, or a

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MERCANTILE LAW citizen decedent, whether resident or nonresident, includes his intangible personal property wherever situated (De Leon, supra, pg. 82-83).

Limitations on no par value shares (5DP - B2tip - AP) 1.

CLASSES OF SHARES OF STOCK 2. Kinds or classifications of shares 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

3. 4.

Par value shares No par value shares Common shares Preferred shares Redeemable shares Treasury shares Founder’s share Voting shares Non-voting shares Convertible shares Watered stock Fractional share Shares in escrow Over-issued stock Street certificate Promotion share

5.

6.

Common shares These are ordinarily and usually issued stocks without extraordinary rights and privileges, and entitle the shareholder to a pro rata division of profits. It represents the residual ownership interest in the corporation. The holders of this kind of share have complete voting rights and they cannot be deprived of the said rights except as provided by law.

Who may classify shares 1. Incorporators - the classes and number of shares which a corporation shall issue are first determined by the incorporators as stated in the articles of incorporation filed with the SEC. 2. Board of directors and stockholders - after the corporation comes into existence, classification of shares may be altered by the board of directors and the stockholders by amending the articles of incorporation pursuant to Sec. 16.

Preferred shares These entitle the shareholder to some priority on distribution of dividends and assets over those holders of common shares. Preferred shares may be issued only with a stated par value (Sec. 6, CC). Kinds of preferred shares 1. Preferred shares as to assets – Shares which gives the holder preference in the distribution of the assets of the corporation in case of liquidation. 2. Participating preferred shares – Entitled to participate with the common shares in excess distribution 3. Non-participating preferred shares – Not entitled to participate with the common shares in excess distribution. 4. Preferred shares as to dividends– Shares which are entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. 5. Cumulative preferred shares – If a dividend is omitted in any year, it must be made up in a later year before any dividend may be paid on the common shares in the later year. 6. Non-cumulative preferred shares – There is no need to make up for undeclared dividends

Par value shares Shares with a value fixed in the articles of incorporation and the certificates of stock. The par value fixes the minimum issue price of the shares (Sec. 62, CC). Rule on the issuance of shares less than its par value GR: A corporation cannot issue shares at less than its par value. XPN: The prohibition applies only to original issuance of shares and not to the subsequent sale of treasury shares and sale of shares made by stockholders. No par value shares These are shares having no stated value in AOI. UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Shares which are no par value, cannot have an issued price of less than P5.00; The entire consideration for its issuance constitutes capital so that no part of it should be Distributed as dividends; They cannot be issued as Preferred stocks; They cannot be issued by Banks, Building and loan association, Trust companies, Insurance companies, and Public utilities; The Articles of incorporation must state the fact that it issued no par value shares as well as the number of said shares; Once issued, they are deemed fully Paid and non-assessable (Sec. 6, CC).

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shares and pay the dividends due. Will the suit prosper?

Holders of preferred shares cannot compel the corporation to give them dividends. The preference only applies once dividends are declared.

These are shares of stocks issued by a corporation which said corporation can purchase or take up from their holders upon expiry of the period stated in certificates of stock representing said shares (Sec. 8, CC).

A: No. While redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, this is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption will cause insolvency or inability of the corporation to meet its debts as they mature. Furthermore, the declaration of dividends is dependent upon the availability of surplus profit or unrestricted retained earnings, as the case may be. Shareholders, both common and preferred, are considered risk takers who invest capital in the business and who can look only to what is left after corporate debts and liabilities are fully paid. (Republic Planters Bank v Judge Agana, G.R. No. 51765. March 3, 1997)

Kinds of redeemable shares

Treasury shares

1. Compulsory - the corporation is required to redeem the shares. 2. Optional - the corporation is not mandated to redeem the shares.

Shares that have been earlier issued as fully paid and have thereafter been acquired by the corporation by purchase, donation, and redemption or through some lawful means (Sec. 9, CC).

Limitations on redeemable shares (ATVI)

Rights that can be denied to treasury shares

1.

1. 2.

Preferred cumulative participating share of stock This is a kind of share which gives the holder preference in the payment of dividends ahead of common stockholders and to be paid the dividends due for prior years and to participate further with common stockholders in dividend declaration. Redeemable shares

2.

3.

4.

Issuance of redeemable shares must be expressly provided in the Articles of incorporation; The Terms and conditions affecting said shares must be stated both in the articles of incorporation and in the certificates of stock; Redeemable shares may be deprived of Voting rights in the articles of incorporation, unless otherwise provided in the Code (par. 6, Sec. 6, CC) Redemption cannot be made if it will cause Insolvency of the corporation.

Voting Rights Right to dividends

NOTE: Treasury shares are not retired shares. They do not revert to the unissued shares of the corporation but are regarded as property acquired by the corporation which may be reissued or resold at a price to be fixed by the Board of Directors (SEC Rules Governing Redeemable and Treasury Shares, CCP No. 1-1982).

Other means in which a corporation may acquire its own shares

Reissuance of redeemed shares

1.

Redeemable shares, once redeemed are retired unless reissuance is expressly allowed in the AOI.

2. 3.

Q: Planters Bank issued preferred redeemable shares with a feature that entitles them to be preferred in the payment of dividends. Subsequently, the bank experienced liquidity problems. The Central Bank ruled that the bank has a reserve deficiency. Despite of the condition, one of the stockholders holding the preferred shares filed an action against the corporation to redeem his

4. 5.

To collect or compromise unpaid indebtedness to the corporation; To eliminate fractional shares; To pay dissenting or withdrawing stockholders entitled to payment for their shares; Redemption; and Close corporation.

Limitations on treasury shares 1. 2.

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They may be re-issued or sold again as long as it is for a reasonable price fixed by the BOD. Cannot participate in dividends. UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW 3.

It cannot be represented during stockholder’s meetings. The amount of URE equivalent to the cost of treasury shares being held shall be restricted from being declared and issued as dividends.

always be a class or series of shares which have complete voting rights (Sec. 6, CC).

NOTE: When treasury shares are sold below its par or issued value, there can be no watering of stock because such watering of stock contemplates an original issuance of shares.

These redeemable and preferred shares, when such voting rights are denied, shall nevertheless be entitled to vote on the following fundamental matters: 1. Amendment of articles of incorporation 2. Adoption and amendment of by-laws 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 this Code 8. Dissolution of the corporation (par. 6, Sec. 6, CC).

4.

Instances when holders of non-voting shares are allowed to vote

Treasury shares v. Redeemable shares TREASURY SHARES Shares so acquired by the corporation through purchase, donation, redemption or any other lawful means

Can only be acquired in the presence of Unrestricted retained earnings

Must comply with the trust fund doctrine

REDEEMABLE SHARES Issued by the corporation when expressly so provided in the articles of incorporation. Redeemable shares may be acquired even without unrestricted retained earnings for as long as it will not result to the insolvency of the Corporation. Is an exception to the trust fund doctrine

Convertible shares A share that is changeable by the stockholder from one class to another at a certain price and within a certain period.

Founders' shares

GR: Stockholder may demand conversion at his pleasure.

Shares classified as such in the articles of incorporation which may be given special preference in voting rights and dividend payments.

XPN: Otherwise restricted by the articles of incorporation. Fractional share

Limitations in the issuance of founders' shares

A fractional share is a share of equity that is less than one full share.

The exclusive right to vote and be voted for as director is granted, this privilege is subject to approval by the SEC, and cannot exceed 5 years from the date of approval (Sec. 7, CC).

Shares in escrow Subject to an agreement by virtue of which the share is deposited by the grantor or his agent with a third person to be kept by the depositary until the performance of certain condition or the happening of a certain event contained in the agreement.

Voting shares Shares with a right to vote. If the stock is originally issued as voting stock, it may not thereafter be deprived of the right to vote without the consent of the holder.

Over-issued stock

Non-voting shares

It is a stock issued in excess of the authorized capital stock. Stocks which are issued in this manner are null and void.

Shares without right to vote. The law only authorizes the denial of voting rights in the case of redeemable shares and preferred shares, provided that there shall UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE NOTE: Interest contemplated in Sec. 66 pertains to moratory interest which is the interest on account of subscription in an installment basis, while Sec. 67 speaks of compensatory interest which is the interest on account of delay.

Street certificate It is a stock certificate endorsed by the registered holder in blank and the transferee can command its transfer to his name from issuing corporation.

Moratory v. Compensatory interest

Promotional share

1. Compensatory interest (under Sec. 67, CC) – Interest which accrues by way of penalty, on the date specified in the contract of subscription or on the date stated in the call made by the board. 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. 2. Moratory Interest (under Sec. 66, CC) – Interest on unpaid subscription by reason of amortization/ installments. It can be collected only if stipulated and for the rate specified in the contract and fixed by the by-laws. If the rate is silent the legal rate shall be followed.

This is a share issued to promoters or those in some way interested in the company, for incorporating the company, or for services rendered in launching or promoting the welfare of the company. Watered stock Shares issued below its par value or issued value. NOTE: Watered stocks pertain only to original issuance of shares.

A corporation can designate other classes of stocks There can be other classifications as long as they are indicated in the AOI, stock certificate and not contrary to law.

Effect of failure to pay the subscription on the date it is due

PAYMENT OF BALANCE OF SUBSCRIPTION

It shall render the entire balance due and payable and shall make the shareholder liable for compensatory interest at the legal rate on such balance, unless a different rate of interest is provided in the by‐laws.

Time when the balance of the subscription should be paid 1. On the date specified in the subscription contract, without need of demand or call, or 2. If no date of payment has been specified, on the date specified on the call made by the BOD; (Sec. 67, CC) 3. If no date of payment has been specified on the call made, within 30 days from the date of call; 4. When insolvency supervenes upon a corporation and the court assumes jurisdiction to wind it up, all unpaid subscriptions become payable on demand, and are at once recoverable, without necessity of any prior call.

Remedies of corporations to enforce payment of stocks 1. 2.

Extra-judicial sale at public auction (Sec. 67, CC) Judicial action (Sec. 70, CC) CALL BY BOARD OF DIRECTORS

Call for the payment by the board of directors for unpaid subscription A call is made in a form of board resolution that unpaid subscription to the capital stock are due and payable and the same or such percentage thereof shall be collected, together with all accrued interest, on a specified date and that if no payment is made within 30 days from said date, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to public auction sale.

Accrual of interest on unpaid balance Unpaid balance will accrue interest if so required by the by‐laws and at the rate of interest fixed in the by‐laws. If no rate of interest is fixed in the by‐laws, such rate shall be deemed to be the legal rate (Sec. 66, CC). The above interest is different from the interest contemplated by Sec. 67, the unpaid balance involved in which, will only accrue interest, by way of penalty, on the date specified in the contract of subscription or on the date stated in the call made by the board.

Unpaid claim It refers to any unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other

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MERCANTILE LAW transaction (Sundiang, supra, 2009, pg. 245, citing China Bank vs. CA, March 26, 1997).

b. Subjects the shares to interest expenses and costs; c. Disenfranchises the shares from any right that inheres to a stockholder, except the right to dividends (Sec. 71, CC) (but which shall be applied to any amount due on said shares, or, in the case of stock dividends, to be withheld by the corporation until full payment of the delinquent shares (Sec. 43, CC). 2. Upon the director owning delinquent shares a. If the delinquent stockholder is a director, the director shall continue to be a director but he cannot run for re-election (Sundiang, supra, 2009, pg. 247.) b. A delinquent stockholder seeking to be elected as director may not be a candidate for, not be duly elected to, the board.

Requisites for a valid call SEC opined on July 21, 1976 that the following are the requisites for a valid call: 1. It must be made in the manner prescribed by law; 2. It must be made by the BOD; and 3. It must operate uniformly upon all the shareholders. The call of the board of directors is not always necessary to collect payment for unpaid subscription The necessity for calls depends upon the provisions of the contract of subscription. When no time is fixed for payment, the subscription is payable only upon call by the BOD which may be made at any time the board may decide (De Leon, supra, pg. 616).

Status of the stockholder from delinquency date before auction sale

However, a call is not necessary where: 1. The subscription contract specifies the date of payment; or 2. The corporation becomes insolvent (Sundiang, supra, 2009, pg. 245) 3. The subscriber becomes insolvent (De Leon, supra, pg. 616)

All the rights of the stockholder are suspended except the right to dividends. With respect to dividends, Section 43 states that cash dividends should be applied against unpaid subscription while stock dividends should be withheld until full payment of the subscription. CALL BY RESOLUTION OF THE BOARD OF DIRECTORS

NOTICE REQUIREMENT The notice of the call has to be served on the stockholders concerned in the manner prescribed in the call, which may either be by registered mail and/or personal delivery and publication.

Stocks become delinquent when the unpaid subscription and accrued interests thereon are not paid within 30 days from their due date as specified in the subscription contract or in the call by the board of directors.

Notice of call is necessary to bind the stockholders (ibid., citing Baltazar vs. Lingayen Gulf Electric Power, 14 SCRA 522).

The delinquency is automatic after said 30 day period and does not need a declaration by the board making the stock delinquent.

SALE OF DELINQUENT SHARES

NOTICE OF SALE

If within 30 days from expiry of the date of payment or from the date stated in the call made by the board, and no payment is made, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to delinquency sale unless the BOD orders otherwise (Sec. 67, CC).

The notice of sale and copy of the board resolution ordering the sale shall be: 1. Sent to every delinquent stockholder either personally or by registered mail or; 2. Published once a week for 2 consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located (Sec. 68, CC)

EFFECT OF DELINQUENCY Effects of stock delinquency 1. Upon the stockholder a. Accelerates the entire amount of the unpaid subscription;

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CORPORATION CODE the offer to purchase, which the corporation is free to accept or reject (ibid., pg. 621).

AUCTION SALE AND THE HIGHEST BIDDER Procedure for the sale of delinquent stocks

Q: What happens to the remaining shares, if any, were not sold?

1. Resolution – the board shall issue resolution ordering the sale of delinquent stock 2. Notice – notice of said sale, with a copy of the resolution, shall be sent to every delinquent stockholder either personally or by registered mail 3. Publication – the notice shall furthermore be published once a week for two consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation is located 4. Sale – the delinquent stock shall be sold at the public auction to be held not less than 30 days nor more than 60 days from the date stocks become delinquent; 5. Transfer – the stock so purchased shall be transferred to such purchaser in the books of the corporation and a certificate for such stock shall be issued in his favor; and 6. Credit remainder – the remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering the same (Sec. 68, CC; Aquino, Philippine Corporate Law Compendium, 2006).

A: The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares (Sec. 68, CC). Rule on questioning the sale of delinquent share in public auction GR: The sale at public auction of delinquent share is absolute and not subject to redemption. XPN: An action may be filed to question the sale, the requisites for which are: 1. There should be allegation and proof of irregularity or defect in the notice of sale or in the sale itself. 2. The party filing the action must first pay the party holding the stock the sum for which the stock was sold with legal interest from the date of sale. 3. The action is filed within 6 months from the date of sale (Sec. 69, CC). Prescription period of the action to question a delinquency sale For stock corporations, the action prescribes 6 months from such sale. However, in case of non-stock corporations, the applicable period is 4 years under the Civil Code.

Discontinuance or cancellation of delinquency sale Delinquency sale may be discontinued or canceled if the delinquent stockholder pays the unpaid balance plus interest, costs and expenses on or before the date specified for the sale or when the BOD orders otherwise (Sec. 68, CC).

CERTIFICATE OF STOCK Certificate of stock

Winning bidder in a delinquency sale

It is a written evidence of the shares of stock but it is not the share itself (Sundiang, supra, 2009, pg. 235, citing Lincoln Phils. Life vs. CA, 293 SCRA 92).

1. The person participating in the delinquency sale who offers to pay the full amount of the balance of the subscription together with the accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares; 2. If there is no bidder as mentioned above, the corporation, subject to the provisions of Sec. 68, CC, may bid for the same, and the total amount due shall be credited as paid in full in the books of the corporation. The purchase by the corporation must be made out of net earnings in view of the trust fund doctrine. Thereafter, the reacquired shares shall be considered as treasury shares (Sec. 41; De Leon, supra, pg. 622).

Shares of stock v. Certificates of stock SHARE OF STOCK Unit of interest in a corporation It is an incorporeal or intangible property It may be recognized by the corporation even if the subscription is not fully paid.

NOTE: The board is not bound to accept the highest bid unless the contrary appears. The bidder is the one making

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CERTIFICATE OF STOCK Evidence of the holder’s ownership of the stock and of his right as a shareholder and of his extent specified therein. It is concrete and tangible It may be issued only if the subscription is fully paid.

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW defenses as the registered owner or creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel (Republic v.s Sandiganbayan, 403 SCRA 84 [2003]).

NATURE OF THE CERTICIATE A certificate of stock is a prima facie evidence of ownership and evidence can be presented to determine the real owner of the shares (Bitong vs. CA, supra).

Q: A is the registered owner of Stock Certificate No. 000011. He entrusted the possession of said certificate to his best friend B who borrowed the said endorsed certificate to support B's application for passport (or for a purpose other than transfer). But B sold the certificate to X, a bona fide purchaser who relied on the endorsed certificates and believed him to be the owner thereof. Can A claim the shares of stocks from X? Explain. (2001 Bar Question)

It is not essential to the existence of a share of stock or the creation of the relation of the shareholder with the corporation (Tan vs. SEC, 206 SCRA 740 [1992]). UNCERTIFICATED SHARES Uncertificated share An uncertificated share is a subscription duly recorded in the corporate books but has no corresponding certificate of stock yet issued.

A: No. Since the shares were already transferred to "B", "A" cannot claim the shares of stock from "X". The certificate of stock covering said shares have been duly endorsed by "A" and entrusted by him to "B". By his said acts, "A" is now estopped from claiming said shares from "X", a bona fide purchaser who relied on the endorsement by “A” of the certificate of stock.

Stockholder may alienate his shares even if there is no certificate of stock issued by the corporation The absence of a certificate of stock does not preclude the stock holder from alienating or transferring his shares of stock.

REQUIREMENTS FOR VALID TRANSFER OF STOCK

Transfers of fully paid subscription but the corporations has not yet issued a certificate of stock

Requirements for valid transfer of stocks The following are the requirements for valid transfer of stocks: 1. If represented by a certificate, the following must be strictly complied with: a. Indorsement by the owner and his agent b. Delivery of the certificate c. To be valid to third parties and to the corporation, the transfer must be recorded in the books of the corporation (Rural Bank of Lipa v. CA, G.R. No. 124535, Sept 28, 2001). 2. If NOT represented by a certificate (such as when the certificate has not yet been issued or where for some reason is not in the possession of the stockholder): ` a. By means of deed of assignment; and b. Such is duly recorded in the books of the corporation (Sundiang, supra, 2009, pg. 236).

In case of a fully paid subscription, without the corporation having issued a certificate of stock, the transfer may be effected by the subscriber or stockholder executing a contract of sale of deed of assignment covering the number of shares sold and submitting said contract or deed to the corporate secretary for recording. Transfers of subscription not fully paid In case of subscription not fully paid, the corporation may record such transfer, provided that the transfer is approved by the board of directors and the transferee executes a verified assumption of obligation to pay the unpaid balance of the subscription. NEGOTIABLITY

Effect of the non-payment of Documentary Stamp Tax

Stock certificate is not negotiable No sale, exchange, transfer or similar transaction intended to convey ownership of, or title to any share of stock shall be registered in the books of the corporation unless the receipts of payment of the tax herein imposed is filed with and recorded by the

Although a stock certificate is sometimes regarded as quasi-negotiable, in the sense that it may be transferred b delivery, it is well-settled that the instrument is NON-NEGOTIABLE, because the holder thereof takes it without prejudice to such rights or UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE stock transfer agent or secretary of the corporation (Section 11 of Revenue Regulations No. 6-2008). Stockholder may bring suit to compel the corporate secretary to register valid transfer of stocks It is the corporate secretary’s ministerial duty and obligation to register transfers of stocks provided all the requirements for a valid transfer had been complied with.

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MERCANTILE LAW Remedies where corporation refuses to transfer certificate of stocks 1. 2. 3.

stock was issued Razon had not questioned the ownership by Juan of the shares of stock in question and had not brought any action to have the certificate of stock over the said shares cancelled. However, the certificate of stock was in the possession of Razon who refused to deliver said shares to Juan, until the same was surrendered by Razon and deposited in a safety box in Philippine Bank of Commerce. The CFI declared that Razon is the owner of the said shares of stock. The then IAC, however, reversed the trial court's decision and ruled that Juan T. Chuidian, the deceased father of Vicente B. Chuidian is the owner of the shares of stock. Who is the owner of the subject shares of stock?

Petition for mandamus Suit for specific performance of an express or implied contract May sue for damages where specific performance cannot be granted

NOTE: There must be a special power of attorney executed by the registered owner of the share authorizing transferor to demand transfer in the stock and transfer book (Ponce vs. Arsons Cement, G.R. No. 139802, Dec. 10, 2002). The law does not prescribe a period within which the registration of the transfer of shares should be effected. Hence, the action to enforce the right does not accrue until there has been a demand and a refusal concerning the transfer.

A: Juan is the owner. In the instant case, there is no dispute that the questioned 1,500 shares of stock of E. Razon, Inc. are in the name of the late Juan Chuidian in the books of the corporation. Moreover, the records show that during his lifetime Chuidian was elected member of the Board of Directors of the corporation which clearly shows that he was a stockholder of the corporation. From the point of view of the corporation, therefore, Chuidian was the owner of the 1,500 shares of stock. In such a case, Razon who claims ownership over the questioned shares of stock must show that the same were transferred to him by proving that all the requirements for the effective transfer of shares of stock in accordance with the corporation's by laws, if any, were followed. The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be properly indorsed and that title to such certificate of stock is vested in the transferee by the delivery of the duly indorsed certificate of stock. Since the certificate of stock covering the questioned 1,500 shares of stock registered in the name of the late Juan Chuidian was never indorsed to Razon, the inevitable conclusion is that the questioned shares of stock belong to Chuidian. The Razon’s asseveration that he did not require an indorsement of the certificate of stock in view of his intimate friendship with the late Juan Chuidian can not overcome the failure to follow the procedure required by law or the proper conduct of business even among friends (Enrique Razon v. IAC, et al., G.R. No. 74306, March 16, 1992).

Valid refusal by the corporation to register the transfer of shares The corporation may refuse to register the transfer of shares if it has an existing unpaid claim over the shares to be transferred. The “unpaid claim” refers to the unpaid subscription on the shares transferred and not to any other indebtedness that the transferor may have to the corporation (Sec. 63, CC). NOTE: If the contract of subscription is still not fully paid, the consent of the corporation must be obtained first since there would be a change of debtor. Hence, the consent of the creditor (corporation) is necessary.

Kind of transfer that requires registration in the books of the corporation Only absolute transfers are required to be registered in the books of the corporation. Hence, registration in the stock and transfer book is not necessary if the conveyance is by way of chattel mortgage. However, registration must be had with the Register of Deeds (Chua Guan vs. Samahan, supra.). Validity of a transfer that is not recorded If the transfer is not recorded, t is valid but only insofar as the parties to the transfer are concerned. To bind the corporation, the deed affecting the transfer must be duly recorded in the corporate books (Sec. 63, CC).

Q: Nemesio Garcia filed an action for injunction against spouses Jose and Sally Atinon and Nicolas Jomouad, ex-officio sheriff. Said action stemmed from an earlier case for collection of sum of money, filed by the spouses Atinon against Jaime Dico. In that case the trial court rendered judgment ordering Dico to pay the spouses Atinon. After said judgment

Q: Enrique Razon organized the E. Razon, Inc. for the purpose of bidding for the arrastre services in South Harbor, Manila. Stock certificate No. 003 for 1,500 shares of stock of E. Razon was issued in the name of Juan T. Chuidian. From the time the certificate of UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE became final and executory, the sheriff proceeded with its execution. In the course thereof, the Proprietary Ownership Certificate (POC) in the Cebu Country Club, which was in the name of Dico, was levied on and scheduled for public auction. Claiming ownership over the subject certificate, Garcia filed the action for injunction to enjoin the spouses Antinon from proceeding with the auction. The trial court dismissed the complaint. The CA affirmed. Garcia contends that the subject stock of certificate, albeit in the name of Dico, cannot be levied upon the execution to satisfy his judgment debt because even prior to the institution of the case for collection of sum of money against him, the spouses Atinon had knowledge that Dico already conveyed back the ownership of the subject certificate to Garcia and that Dico executed a deed of transfer covering the subject certificate in favor of Garcia. Is a bona fide transfer of the shares of a corporation, not registered or noted in the books of the corporation, valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not?

Ponce the of stocks. Because of this, Ponce filed a case and prayed that judgment be rendered ordering ACC to issue in his name certificates of stocks covering the 239,500 shares of stocks. Ponce contends that when a corporate secretary is presented with a document of transfer of fully paid shares, it is his duty to record the transfer in the stock and transfer book of the corporation, issue a new stock certificate in the name of the transferee, and cancel the old one. Ergo, the failure to record the transfer does not mean that the transferee cannot ask for the issuance of stock certificates. ACC, on the other hand maintains that the transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent insofar as the corporation is concerned and no certificate of stock can be issued in the name of the transferee. May the corporate secretary be compelled to register transfer of shares on the basis merely of an indorsement of stock certificates? A: No. Under Section 63 of the Corporation Code, a transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises. Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates in the name of the transferee even when there has been compliance with the requirements of Section 64 of the Corporation Code. The situation would be different if Ponce himself the registered owner of the stock which he sought to transfer to a third party, for then he would be entitled to the remedy of mandamus (Vicente C. Ponce v. Alsons Cement Corporation, et al., G.R. NO. 139802, December 10, 2002).

A: No. A transfer of shares not registered in the books of the corporation is not valid as against subsequent attachment of the shares. All transfers of shares not so entered in the books of the corporation are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subsequent purchasers in good faith, and, indeed, as to all persons interested, except the parties to such transfers. Hence, the transfer of the subject certificate made by Dico to Garcia was not valid as to the spouses Atinon, the judgment creditors, as the same still stood in the name of Dico, the judgment debtor, at the time of the levy on execution (Nemesio Garcia v. Nicolas Jomouad, et al., G.R. No. 133969, January 26, 2000). Q: Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC), having subscribed to and fully paid 239,500 shares of said corporation.Vicente Ponce and Fausto Gaid executed a deed of undertaking and Indorsement whereby the latter acknowledges that the former is the owner of said shares and he was therefore assigning/endorsing the same to Ponce. From the time of incorporation of VCC up to the present, no certificates of stock corresponding to the 239,500 subscribed and fully paid shares of Gaid were issued in the name of Gaid and/or Ponce. Despite repeated demands, VCC, which was later renamed as Alsons Cement Corporationcertificates (ACC) refused and continue to refuse without any justifiable reason to issue to

ISSUANCE Issuance of certificate of stock It may only be issued until the full amount of the stockholder’s subscription together with the interest and expenses (in case of delinquent shares) if due has been paid (Sec. 64, CC).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW 2. After verifying the affidavit and other information and evidence with the books of the corporation, the latter 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 three (3) consecutive weeks at the expense of the registered owner of the Certificate of Stock.

Requisites for the issuance of the certificate of stock 1. The certificate must be signed by the president or vice-president, countersigned by the corporate secretary or assistant secretary (Bitong vs. CA, 292 SCRA 503 [1998]); . NOTE: Unless it complies with the foregoing, it is not deemed issued.

NOTE: Contents of notice: a. Name of the corporation b. Name of the registered owner c. Serial number of the certificate of stock. d. Number of share represented by the certificate of stock.

2. The certificate must be sealed with the seal of the corporation; 3. The certificate shall be issued in accordance with the by-laws; 4. The certificate must be delivered; 5. The par value as to par value shares, or full subscription as to no par value shares must be fully paid, the basis of which is the doctrine of indivisibility of subscription 6. The original certificate must be surrendered where the person requesting the issuance of a certificate is a transferee from the stockholder (ibid.; Sec. 64.).

3. After the expiration of one (1) year from the date of the last publication, if no contest has been presented to said corporation regarding said certificate of stock, the 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. NOTE: After the expiration of the 1 year period to contest, such right shall be barred 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 BOD, in which case, a new certificate may be issued even before the expiration of the 1 year period provided herein.

Rules on right to issuance A corporation may now, in the absence of provisions in their by-laws to the contrary, apply payments made by subscribers-stockholders, either as: 1. Full payment for the corresponding number of shares of stock, the par value of each of which is covered by such payment; OR 2. Payment pro-rata to each and all the entire number of shares subscribed for (Baltazar v. Lingayen Gulf Electric Power Co., Inc, G.R. No. L-16236-38, June 30, 1965).

4. 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 (Sec. 73, CC).

LOST OR DESTROYED CERTIFICATES

Oppositions on the issuance of new certificates

Procedure for the issuance of a new stock certificate in lieu of those which have been lost, stolen or destroyed

If there are oppositions on the issuance of new certificates, the corporation may file an interpleader proceeding to compel the parties to litigate among themselves.

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: a. If possible, the circumstances as to how the certificate was lost, stolen or destroyed, b. The number of shares represented by such certificate, c. The serial number of the certificate and the name of the corporation which issued the same.

Liability of the corporation for the issuance of new certificates of stock in case of lost or destroyed certificate GR: 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.

NOTE: He shall also submit such other information and evidence which he may deem necessary.

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CORPORATION CODE XPN: Where there is fraud, bad faith, or negligence on the part of the corporation and its officers (ibid).

WHO MAY MAKE VALID ENTRIES Entries in stock and transfer books

Q: A stockholder claimed that his stock certificate was lost. After going through with the procedure for the issuance of lost certificate, and no contest was presented within 1 year from the last publication, the corporation issued a new certificate of stock in lieu of the supposed lost certificate. The stockholder immediately sold his shares and endorsed the replacement certificate to a buyer. It turned out that the original certificate was not lost, but sold and endorsed to another person.

The obligation and duty to make proper entries in stock and transfer books falls on the corporate secretary. If the corporate secretary refuses to comply, the stockholder may rightfully bring suit to compel performance. The stockholder cannot take the law on to his hands; otherwise such entry shall be void (Torres, Jr. v. CA, G.R. No. 120138, Sept. 5, 1997). Q: Judge Torres was the majority stockholder of Tormil Realty & Development Corporation (Tormil) while Antonio Torres, et al., who are the children of Judge Torres’ deceased brother constituted the minority stockholders. During the 1987 annual stockholders meeting and election of directors of Tormil, Judge Torres assigned from his own shares, one (1) share each to Tobias, et al. These assigned shares were in the nature of qualifying shares, for the sole purpose of meeting the legal requirement to be able to elect them to the Board of Directors as Torres’ nominees. The nominees were thereafter elected. Consequently, Antonio, et al., instituted a complaint with the SEC praying that the election of the nominees to the Board of Directors be annulled. They alleged that the petitioners-nominees were not legitimate stockholders of Tormil because the assignment of shares to them violated the minority stockholders’ right of pre-emption as provided in the corporation’s articles and by-laws. Among others, the nominees insist that the assignment of “qualifying shares” to them of the late Judge Torres (herein petitioners) does not partake of the real nature of a transfer or conveyance of shares of stock as would call for the “imposition of stringent requirements of recording of the transfer of said shares.” Anyway, the nominees add, there was substantial compliance with the above-stated requirement since said assignments were entered by the late Judge Torres himself in the corporation’s stock and transfer book prior to the annual stockholders meeting. Are the entries made by Judge Torres in the stock and transfer book valid?

1. May the corporation be made liable by the aggrieved party? 2. Who will have a better right over the shares, the endorsee of the original certificate or the endorsee of the replacement certificate? A: 1. No, the corporation cannot be made liable. Except in cases of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which has issued certificates of stock in lieu of those lost, stolen, or destroyed pursuant to the procedure prescribed by law. 2. The endorsee of the replacement certificate has a better right to the shares. After expiration of 1 year from the date of the last publication, and no contest has been presented to said corporation regarding said certificate, the right to make such contest has been barred and said corporation already canceled in its books the certificate which have been lost, stolen, or destroyed and issued in lieu thereof new certificate. STOCK AND TRANSFER BOOK CONTENTS 1. 2. 3. 4.

All stocks in the name of the stockholders alphabetically arranged Amount paid and unpaid on all stocks and the date of payment of any installment Alienation, sale or transfer of stocks Other entries as the by-laws may prescribe (Sundiang, supra, 2009, pg. 247-248).

A: No. The entries are not valid. In the absence of any provision to the contrary, the corporate secretary is the custodian of corporate records. Corollarily, he keeps the stock and transfer book and makes proper and necessary entries therein. Contrary to the generally accepted corporate practice, the stock and transfer book of TORMIL was not kept by Ms. Maria Cristina T. Carlos, the corporate secretary but by respondent Torres, the President and Chairman of the Board of Directors of TORMIL. In contravention

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MERCANTILE LAW Section 74, the stock and transfer book was not kept at the principal office of the corporation either but at the place of Torres. Any entries made in the stock and transfer book on March 8, 1987 by Torres of an alleged transfer of nominal shares to Pabalan and Co. cannot therefore be given any valid effect (Manuel A. Torres, Jr., et al., v. CA, et al., G.R. No. 120138, September 5, 1997).

the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer (Thomson vs. CA, G.R. No. 116631, October 28, 1998). SALE OF PARTIALLY PAID SHARES A stockholder can transfer his shares without being fully paid

Probative value of the stock and transfer book The stock and transfer book is the best evidence of the transactions that must be entered or stated therein. However, the entries are considered prima facie evidence only and may be subject to proof to the contrary (Bitong vs. CA, supra.).

The incomplete payment of the subscription does not preclude the subscriber from alienating his shares of stock. However, the transfer shall be valid only between the parties. A transferee of the partially paid shares cannot compel the corporation to record the transfer of shares in its books, even though he has no knowledge that they are not fully paid

DISPOSITION AND ENCUMBRANCE OF SHARES Registration by the corporation of the transfer of shares in case of alienation As between the parties to the contract of sale, registration of the transfer of shares is not required. However, until the shares are fully paid, such transfer cannot be recorded in the books of the corporation. Consequently, the transferee will not be considered as a stockholder.

Shares of stock against which the corporation holds any unpaid claim shall not be transferable in the books of the corporation. Hence, a transferee of the partially paid shares cannot compel the corporation to record the transfer of shares in its books, even though he has no knowledge that they are not fully paid (Sec. 63, CC).

Reasons for the recording of the alienation of shares

SALE OF A PORTION OF SHARES NOT FULLY PAID

1. To enable the corporation to know at all times their actual stock holders; 2. To afford the corporation the opportunity to object or refuse its consent to the transfer in case it has any claim against the stock; and 3. To avoid fictitious and fraudulent transfer.

Stockholder cannot sell a portion of the shares not fully paid A stockholder who has not paid the full amount of his subscription cannot transfer a portion of his subscription in view of the indivisible nature of the subscription contract (Villanueva, Phil. Corporation Law, pg. 240).

ALLOWABLE RESTRICTIONS ON THE SALE OF SHARES

Liability of the transferee for the balance of the purchase price in case the stockholder on record fails to pay the same

Requisites for a restriction to be valid 1. 2. 3.

Restrictions are provided in the articles of incorporation and It must be printed at the back of the certificate of stock. Must not be more onerous than the right of first refusal

Corporation can provide regulations sale/transfer of the shares of stockholders

to

In case the stockholder on record fails to pay the pay the balance of the purchase price, he is still liable for the balance of the purchase price. Unless the transfer of the shares are recorded, the stockholder is still the owners of the shares as far as the corporation is concerned.

the

Reason: The subscriber is as much bound to pay his subscription as he would be to pay any other debt. (Nava v Peers Marketing Corporaiton, G.R. No. L-28120 November 25, 1976)

Corporation can provide regulations to the sale/transfer of the shares of stockholders but the authority granted to a corporation to regulate the transfer of its stock does not empower it to restrict UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE Q: Po subscribed to 80 shares of Peers Marketing Corporation at one hundred pesos a share with a total value of 8,000 pesos. Po initially paid 2,000 pesos (25% of the amount of subscription). Without paying the full subscription price, Po sold to Nava 20 of his 80 shares. Nava requested the officers of the corporation to register the sale in the books of the corporation. The request was denied because Po has not paid fully the amount of his subscription. Can Nava compel the corporation to register the sale?

of another heir of PX is not sufficient to deny the issuance of new certificates of stock to his wife and children. It would be otherwise if the transferee's title to the shares has no prima facie validity or is uncertain. Recoding of a deed of assignment with the SEC without the transfer of shares does not bind the corporation and 3rd persons The recording of a deed of assignment does not give rise to any legal benefit to the corporation or any person (Sec Memo Circular No. 17, Series of 2004).

A: No. The corporation has a claim on the said shares for the unpaid balance of Po's subscription. A stock subscription is a subsisting liability from the time the subscription is made. The subscriber is as much bound to pay his subscription as he would be to pay any other debt (Ibid).

REQUISITES OF A VALID TRANSFER *Please refer to page 232 for the extensive discussion regarding this topic.

SALE OF ALL SHARES NOT FULLY PAID INVOLUNTARY DEALINGS WITH SHARES The incomplete payment of the subscription does not preclude the subscriber from alienating his shares of stock. However, the transfer shall be valid only between the parties. The corporation has the right to refuse from recording the sale in its books.

Involuntary dealing It refers to such writ, order or process issued by a court of record affecting shares of stocks which by law should be registered to be effective, and also to such instruments which are not the willful acts of the registered owner and which may have been executed even without his knowledge or against his consent.

SALE OF FULLY PAID SHARES Sale of fully paid shares

Examples of involuntary dealings of a share

Sale of fully paid shares is allowed even without the consent of the corporation as long as the requisites for the valid transfer of shares are complied.

1. Attachment 2. Sale on execution of judgment or sales for taxes 3. Adverse claims 4. Foreclosure of mortgage of stocks

Q: Four months before his death, PX assigned 100 shares of stock registered in his name in favor of his wife and his children. They then brought the deed of assignment to the proper corporate officers for registration with the request for the transfer in the corporation's stock and transfer books of the assigned shares, the cancellation of the stock certificates in PX's name, and the issuance of new stock certificates in the names of his wife and his children as the new owners. The officers of the Corporation denied the request on the ground that another heir is contesting the validity of the deed of assignment. May the Corporation be compelled by mandamus to register the shares of stock in the names of the assignees? (2004 Bar Question)

Involuntary dealings must be registered It is the act of registration which creates a constructive notice to the whole world of such instrument or court writ or process and is the operative act that conveys ownership (Aquino, Corporation Law, p. 185, 2007).

DISSOLUTION AND LIQUIDATION Dissolution

A: Yes. The corporation may be compelled by mandamus to register the shares of stock in the name of the assignee. The only legal limitation imposed by Section 63 of the Corporation Code is when the Corporation holds any unpaid claim against the shares intended to be transferred. The alleged claim

It is the extinguishment of the franchise of a corporation and the termination of its corporate existence (Sundiang, supra, 2009).

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MERCANTILE LAW Effects of the dissolution of a corporation 1.

2.

3.

4.

b. By the judgment of the SEC after hearing of petition for voluntary dissolution, where creditors are affected (Sec. 119, CC). c. By amending the AOI to shorten the corporate term (Sec. 120, CC). d. In case of a corporation sole, by submitting to the SEC a verified declaration of the dissolution for approval (Sec. 115, CC). e. Merger or consolidation

Corporation ceases as a body corporate to continue the business for which it was established (Sec. 122, CC). The assets of the corporation will then be Liquidated and legal title to the remaining corporate properties are transferred to the stockholders who become co-owners thereof The Corporation continues as a body corporate for 3 years only for the purpose of winding up or liquidation. A dissolved corporation cannot be revived. However, those interested may reincorporate by refilling a new AOI and by-laws (Rebollido vs. CA, 170 SCRA 800 [1989).

2. Involuntary a. By expiration of corporate term provided for in the AOI (Sec. 11, CC). b. By legislative enactment c. By failure to formally organize and commence the transaction of its business within 2 years from the date of incorporation (Sec. 22, CC). d. By order of the SEC on grounds under existing laws (Sec. 121, CC). e. Judicial decree on Quo Warranto Proceeding (Sec. 20, CC).

Procedure for dissolution of a corporation sole In case of a corporation sole, by submitting to the SEC for approval, a verified declaration of dissolution which will set forth the following: 1. The name of the corporation; 2. The reason for dissolution and winding up; 3. The authorization for the dissolution of the corporation by the particular religious denomination, sect or church; 4. The names and addresses of the persons who are to supervise the winding up of the affairs of the corporation.

NOTE: Methods effecting dissolution as prescribed by statute are exclusive, and a corporation cannot be dissolved except in the manner prescribed by law (De Leon, 2010). The requirements for dissolution mandated by the CC should be strictly complied with (Vesaga vs. CA, 371 SCRA 508, [2001]).

VOLUNTARY

Upon approval of such declaration of dissolution by the Securities and Exchange Commission, the corporation shall cease to carry on its operations except for the purpose of winding up its affairs (Sec. 115, CC).

WHERE NO CREDITORS ARE AFFECTED Procedure of dissolution of a corporation where no creditors are affected (Meet-NAC-PA) 1. A MEETing must be held on the call of directors or trustees; 2. Notice of the meeting a. Given to each stockholder or member either by registered mail or by personal delivery at least thirty (30) days prior to the said meeting and b. Published for three (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 3. Resolution to dissolve must be Approved by majority vote of the board of directors or trustees and adopted by the affirmative vote of stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of members. 4. Copy of the resolution is then certified by the majority of Board of directors or trustees and countersigned by the secretary of the Corporation.

Dissolution by merger or consolidation Upon issuance of SEC of a Certificate of Merger or Consolidation, the corporate existence of the absorbed corporation and the constituent corporations in case of consolidation shall automatically cease. No liquidation proceedings will thereafter be conducted (Sec. 80, CC). MODES OF DISSOLUTION Modes of dissolution The following are the modes of dissolution of the corporation: 1. Voluntary a. By the vote of the BOD/ BOT and the stockholders/ members where no creditors are affected (Sec. 118, CC). UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE 5. Petition for dissolution together with the signed and countersigned copy of the resolution is then filed with the SEC. 6. Approval of SEC of the petition and issuance of certificate of dissolution (Sec. 118, CC).

proceedings will be conducted to protect their interest. BY SHORTENING THE CORPORATE TERM Procedure for dissolving the corporation by shortening of the corporate term (ASAF)

WHERE CREDITORS ARE AFFECTED

1. Amending the Articles of Incorporation pursuant to Sec. 16 a. Approved by majority vote of the board of directors or trustees b. Ratified at a meeting by the stockholders representing at least 2/3 of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations). 2. Copy of the amended AOI shall be submitted with the SEC. 3. Approval of SEC of the amended AOI. 4. As an additional requirement, the SEC requires to submit the final audited Financial statement not older than 60 days before the application for shortening the corporate term.(Sec. 120, CC in relation to Sec. 16 thereof.)

Procedure of dissolution of a corporation where creditors are affected (APSIVECSO – CPUPOOJ) 1. Approval of the stockholders representing at least 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. 2. Filing of Petition for dissolution with SEC, petition must be (SiVeCS) a. SIgned by a majority of its board of directors or trustees or other officers having the management of its affairs; b. VErified by its president or secretary or one of its directors or trustees c. Set forth all Claims and demands against it d. State that its dissolution was approved by the required votes of Stockholders or members. 3. SEC shall issue an Order reciting the purpose of the petition and fix a date when objections thereto may be filed by any person. Said date must not be less than thirty (30) days nor more than sixty (60) days after the entry of the order. 4. Copy of the order shall be: a. 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 b. POsted for three (3) consecutive weeks in three (3) public places in such municipality or city. 5. After expiration of the time to file objections and upon prior 5-day notice to hear the objections, SEC shall proceed to hear the petition and try any issue made by the Objections file. 6. If no 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.

Q: The Securities and Exchange Commission approved the amendment of the articles of incorporation of GHQ Corporation shortening its corporate life to only 25 years in accordance with Sec. 120 of the Corporation Code. As shortened, the corporation continued its business operations until May 30, 1997, the last day of its corporate existence. Prior to said date, there were a number of pending civil actions, of varying nature but mostly money claims filed by creditors, none of which was expected to be completed or resolved within five years from May 30, 1997. If the creditors had sought your professional help at that time about whether or not their cases could be pursued beyond May 30, 1997, what would have been your advice? (2000 Bar Question) A: The cases can be pursued even beyond May 30, 1997, the last day of the corporate existence of GHQ Corporation. The corporation is not actually dissolved upon the expiration of its corporate term. There is still the period for liquidation or winding up. Q: X Corporation shortened its corporate life by amending its articles of incorporation. It has no debts but owns a prime property located in Quezon City. How would the said property be liquidated among the five stockholders of said corporation? Discuss two methods of liquidation. (2001 Bar Question)

Creditor’s consent is not necessary for dissolution Consents of creditors are not necessary to approve dissolution for the reason that liquidation

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MERCANTILE LAW A: The prime property of X Corporation can be liquidated among the five stockholders after the property has been conveyed by the corporation to the five stockholders, by dividing or partitioning it among themselves in any two of the following ways: 1. By physical division or partition based on the proportion of the values of their stockholdings; or 2. By selling the property to a third person and dividing the proceeds among the five stockholders in proportion to their stockholdings; or 3. After the determination of the value of the property, by assigning or transferring the property to one stockholder with the obligation on the part of said stockholder to pay the other four stockholders the amount/s in proportion to the value of the stockholding of each.

body corporate for the purpose of continuing the business for which it was organized, except only for purposes connected with its winding up or liquidation. Extending the lease is not an act to wind up or litigate XYZ’s affairs. It is contrary to the idea of winding up the affairs of the corporation (PNB v. CFI of Rizal, May 27, 1992).

INVOLUNTARY

There is nothing to prevent the stockholders from conveying their shareholdings toward the creation of a new corporation to continue the business of the old. Winding up is the sole activity of a dissolved corporation that does not intend to incorporate anew.

Remedy in case the stockholders want to still continue the business of the corporation after its term expired The remedy of the stockholders is reincorporation. Amending the articles of the incorporation to extend the corporate term is not an available remedy as the corporation has ceased to exist.

EXPIRATION OF CORPORATE TERM Expiration of the corporate term The corporation shall exist within the period stated in the AOI not exceeding 50 years unless sooner legally dissolved (Secs. 19, 22, 117-122, 144, 145, CC) or unless its registration is revoked upon any of the grounds provided by law (Sec. 6, PD 902-A & Sec. 22, CC). In the absence of any express stipulation, it shall exist for a period not exceeding fifty (50) years from the date of incorporation. After the term had expired without extension, the corporation is dissolved.

It is not unlawful for the old board of directors to negotiate and transfer the assets of the dissolved corporation to the new corporation intended to be created as long as the stockholders have given their consent (Chung Ka Bio v Intermediate Appellate Court, 1988). FAILURE TO ORGANIZE AND COMMENCE BUSINESS WITHIN 2 YEARS FROM INCORPORATION

Q: XYZ Corporation entered into a contract of lease with ABC, Inc., over a piece of real estate for a term of 20 years, renewable for another 20 years, provided that XYZ's corporate term is extended in accordance with law. Four years after the term of XYZ Corporation expired, but still within the period allowed by the lease contract for the extension of the lease period, XYZ Corp. notified ABC, Inc., that it is exercising the option to extend the lease. ABC, Inc., objected to the proposed extension, arguing that since the corporate life of XYZ Corp. had expired, it could no longer opt to renew the lease. XYZ Corp. countered that withstanding the lapse of its corporate term it still has the right to renew the lease because no quo warranto proceedings for involuntary dissolution of XYZ Corp. has been instituted by the Office of the Solicitor General. Is the contention of XYZ Corp. meritorious? Explain briefly (2004 Bar Question).

Meaning of “formally organize” Organize as used in reference to corporations means; 1. Election of officers, providing for the subscription and 2. Payment of the capital stock, and 3. Adoption of by-laws, and 4. Such other similar steps as are necessary to endow the legal entity with the capacity to transact the legitimate business for which it was created (Benguet Consolidated Mining Co. v Pineda, G.R. No. L-7231, March 28, 1956). Effect of failure of a corporation to formally organize If a corporation does not formally organize and commence the transaction of its business or the construction of its works within two (2) years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved (Sec 22, CC).

A: No, XYZ Corporation’s contention is not meritorious XYZ Corp. was dissolved ipso facto upon the expiration of its original term. It ceased to be a UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE LEGISLATIVE DISSOLUTION

METHODS OF LIQUIDATION

A corporation created by special law can be dissolved by an enactment of special law or expiration of its charter.

Liquidation Process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors and the remaining balance if any is to be distributed to the stockholders (Sundiang, 2014).

DISSOLUTION BY THE SEC ON GROUNDS UNDER EXISTING LAWS Dissolution by SEC

Method of liquidation 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 (Sec. 121, CC).

1. By the corporation itself or its board of directors or trustees; (par.1,Sec. 122, CC) 2. By a trustee to whom the assets of the corporation had been conveyed. (par. 2, Sec. 122, CC); (Board of Liquidators v. Kalaw, G.R. No. L‐18805, Aug. 14, 1967) 3. By a management committee or rehabilitation receiver appointed by SEC; (last par., Sec. 119, CC.)

The following are some of the grounds, which may result to the issuance of a dissolution order by the SEC after conduct of appropriate proceedings: 1. Violations of the Corporation committed by the corporation. Such violations are generally penalized by Sec. 144 as the Code did not specifically penalized the same. 2. Deadlocks in a close corporation (Sec. 104, CC) 3. Mismanagement of a close corporation (Sec. 105, CC) 4. On any of the following grounds, wherein the SEC retains its power to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of the corporations, partnerships or associations: (FMI-DBR) a. Fraud or misrepresentation in procuring its Certificate of Registration; b. Serious Misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public; c. Continuous Inoperation for a period of at least 5 years (Sec. 22, CC); d. Refusal to comply or Defiance with any lawful order, rules or regulations of SEC restraining commission of acts which would amount to a grave violation of its franchise; e. Failure to file By-laws within the required period. However, SEC must give the corporation the opportunity to explain such failure; f. Failure within the prescribed period to submit required Reports in appropriate forms as determined by the SEC (e.g. General Information Sheet, Financial Statements) (De Leon, 2010).

Approval of the SEC is not required in order to liquidate and distribute the assets of a dissolved corporation The liquidation and distribution of the assets of a dissolved corporation is a matter of internal concern of the corporation and falls within the power of the directors and stockholders or duly appointed liquidation trustee (SEC Opinion, July 23, 1996) Period of Liquidation The period of liquidation is three (3) years. Corporation in the process of liquidation does not have legal authority to engage in any new business A corporation in the process of liquidation has no legal authority to engage in any new business, even if the same is in accordance with the primary purpose stated in its article of incorporation. Suits brought against the corporation within the 3-year period but remained pending beyond said period Pending actions against the corporation are not extinguished. They may still be prosecuted against the corporation even beyond said period. The creditors of the corporation who were not paid within the 3-year period may follow the property of the corporation that may have passed to its stockholders unless barred by prescription or laches or disposition of said property in favor of a purchaser in good faith.

NOTE: All actions filed with the SEC must be prosecuted and defended in the name of the real party-in-interest (Rule III, Sec. 2, SEC Rules of Procedure).

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MERCANTILE LAW Suits not brought against the corporation within the 3-year period

8. 9.

Suits not brought against the corporation within the 3-year period may still be prosecuted against the corporation, since there is nothing in Sec. 122, par. 1 which bars action for the recovery of the debts of the corporation against the liquidator thereof after the lapse of the winding up period of 3 years (Republic of the Philippines vs. Marsman Dev. Co., 44 SCRA 418 [1972]).

Withdrawal of a stockholder in a close corporation (Sec 105, CC) Upon lawful dissolution and after payment of all debts and liabilities (Sec. 122, CC)

Order of distribution of assets in case of liquidation (CreSt-PreComE) 1. Payment of claims of CREditors who are not stockholders (based on preference or concurrence of credits) 2. Payment of claims of STockholders who are creditors of the corporation, as to the amount of their claim as creditors. 3. Residual Balance shall be distributed proportionately: a. Holders of PREferred stock, if any; then to the b. Holders of COMmon stock 4. If the creditor or stockholder cannot be found, their claims or shares shall be Escheated in favor of the city or municipality where the asset is located.

Right of the corporation to appeal a judgment is not extinguished by the expiration of the 3-year period Corporations whose certificate of registration was revoked by the SEC may still maintain actions in court for the protection of its rights which includes the right to appeal (Paramount Insurance Corp. v A.C. Ordonez Corp, 2008). Liquidation is not necessary in case a corporation is dissolved by merger and consolidation

BY THE CORPORATION ITSELF

In case of merger or consolidation, the surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed (Sec 80, CC).

Liquidation by the corporation itself 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: 1. Shall nevertheless be continued as a body corporate for 3 years after the time when it would have been so dissolved, 2. For the purpose of a. Prosecuting and defending suits by or against it; b. Enabling it to settle and close its affairs; c. To dispose of and convey its property; and d. to distribute its assets 3. But NOT for the purpose of continuing the business for which it was established (par.1, Sec. 122, CC).

Distribution of the corporation’s assets prior to dissolution GR: A corporation cannot distribute its assets prior to dissolution. This will violate the trust fund doctrine. A corporation is allowed to distribute its assets or property only upon lawful dissolution and after payment of all its debts and liabilities (Sec. 122, CC).

CONVEYANCE TO A TRUSTEE WITHIN A 3-YEAR PERIOD Conveyance to a trustee within a 3 year-period

XPNs: 1. Decrease of Capital Stock (Sec. 38, CC) 2. Redemption of Redeemable Shares (Sec. 8, CC) 4. Reacquisition of shares which are considered as treasury shares (Sec. 9, CC) 5. Acquisition of own shares (Sec. 41, CC) 6. Declaration of dividends (Sec. 43, CC) 7. Purchase of shares of any stockholder in case of deadlocks in a close corporation (par 1[4], Sec. 10, CC) UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

At anytime during the 3-year period for liquidation, said corporation is authorized and empowered to convey all of its property to trustees for the benefit of its 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

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CORPORATION CODE 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 ( par. [2], Sec. 122, CC).

charge of the liquidation of the corporation (last par, Sec. 119, CC).

Period of existence of the trusteeship

Appointment of receiver for a going corporation

Where no time limit has been fixed with respect to the existence of the trusteeship, the trustee has authority to close the affairs of the corporation even after the expiration of the statutory 3-year period and claims not barred by the statute of limitations can be presented and allowed until the liquidation is terminated (National Abaca & Other Fibers Corp. vs. Pore, 2 SCRA 989 [1961]).

The appointment of a receiver for a going corporation is a last resort remedy, and should not be employed when another remedy is available. Relief by receivership is an extraordinary remedy and is never exercised if there is an adequate remedy at law or if the harm can be prevented by an injunction or a restraining order. Bad judgment by directors, or even unauthorized use and misapplication of the company’s funds, will not justify the appointment of a receiver for the corporation if appropriate relief can otherwise be had (Rev. Ao-As vs. CA, GR 128464, June 20, 2006).

NOTE: Thus, the appointment of receiver is addressed to the sound discretion of the court or the SEC.

Suits brought by the corporation within the 3-year period but remained pending beyond said period A corporation that has a pending action and which cannot be terminated within the 3 year period after its dissolution is authorized under Sec. 122 of the CC to convey all its property to a trustee to enable it to prosecute and defend suits by or against the corporation beyond the 3-year period. The trustee may commence a suit which can proceed to final judgment even beyond the 3-year period. The director may be permitted to continue as trustees to complete the liquidation (Clemente vs. CA, 242 SCRA 717 [1995]).

The corporation, through its president cannot condone penalties and charges after it had been placed under receivership The appointment of a receiver operates to suspend the authority of a corporation and of its directors and officers over its property and effects, such authority being reposed in the receiver (Yam v. CA, G.R. No. 104726 Feb 11, 1999). . LIQUIDATION AFTER 3 YEARS

Suits brought by the corporation beyond the 3-year period are not barred

If the 3-year extended life has expired without a receiver or trustee having been expressly designated by the corporation within that period: 1. The BOT/BOT itself may be permitted to so continue as ‘trustees” by legal implication to complete the liquidation. 2. Still, in the absence of BOD/BOT, those having a pecuniary interest in the corporate assets, including not only the stockholders but likewise the creditors of the corporation, acting for and in its behalf, may make proper representations with the SEC which has primary and sufficiently broad jurisdiction in matters of this nature, for working out a final settlement of the corporate concerns. 3. The only surviving stockholder or director of a corporation whose term of existence has expired may act as trustee-in-liquidation after the 3-year period to liquidate has expired without the appointment of a trustee-in-liquidation. 4. The counsel who prosecuted and defended the interest of the corporation and who, in fact, appeared in behalf of the corporation, may be considered a trustee of the corporation at least with respect to the matter in litigation only (De

The trustee of a dissolved corporation may commence a suit which can proceed to final judgment even beyond the 3-year period. The expiration of 3 years after the dissolution of a corporation does not affect its right to enforce a favorable judgment, because under Sec. 145 of the CC, no right or remedy in favor or against any corporation shall be removed or impaired either by subsequent dissolution of said corporation or by any subsequent amendment or repeal of the CC or any part thereof (Knecht vs. United Cigarette Corp., 384 SCRA 48 [2002]). BY MANAGEMENT COMMITTEE OR REHABILITATION RECEIVER Liquidation by a receiver In the case of a dissolution order where creditors are affected, the SEC may appoint a receiver to take

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MERCANTILE LAW Leon, supra, pgs. 768-769, citing: Sec. 145, CC; Clemente vs. CA, supra; SEC Opinion No. 10-96, Jan. 29, 2010, Reburiano vs. CA, 301 SCRA 342 [1999]).

repeated demands refused to execute the Transfer of Rights/Deed of Assignment which is necessary to transfer the certificate of title. Later on, ACL Development Corporation and Motorich entered into a sale whereby the former transferred to the latter the subject property. Because of this, San Juan filed a case for damage against Motorich and Nenita Lee Gruenberg. Among others, San Juan, Inc. argues that the veil of corporate fiction of Motorich should be pierced, because the latter is a close corporation. Since the spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all or almost all or 99.866% to be accurate, of the subscribed capital stock of Motorich, the spouses needed no authorization from the board to enter into the subject contract. It adds that, being solely owned by the Spouses Gruenberg, the company can be treated as a close corporation which can be bound by the acts of its principal stockholder who needs no specific authority. Is Motorich a close corporation?

OTHER CORPORATIONS CLOSE CORPORATION Close corporation A close corporation is one whose AOI provide that: 1. All of 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 of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by the provisions on close corporations; and 3. The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class.

A: No. The articles of incorporation of Motorich Sales Corporation does not contain any provision stating that (1) the number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted in favor of any stockholder or of the corporation, or (3) listing its stocks in any stock exchange or making a public offering of such stocks is prohibited. From its articles, it is clear that Motorich is not a close corporation. Motorich does not become one either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital stock. The mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personalities. So too, a narrow distribution of ownership does not, by itself, make a close corporation (San Juan Structural and Steel Fabricators, Inc., v. CA, G.R. No. 129459, September 29, 1998).

Notwithstanding the foregoing, a corporation shall be deemed NOT 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: (MOSBI-PEP) 1. Mining or Oil companies, 2. Stock exchanges, 3. Banks, 4. Insurance companies, 5. Public utilities, 6. Educational institutions and 7. Corporations declared to be vested with Public interest in accordance with the provisions of the Corporation Code (Sec. 96, CC).

CHARACTERISTICS OF A CLOSE CORPORATION

Not all corporations with 20 or less stockholders are close corporations

Nature of a close corporation The Corporation is not a close corporation even if the shares belong to only twenty or less stockholders if not all the requisites (under Sec. 96) are present (San Juan Structural and Steel Fabricators, Inc. v. CA, G.R. No. 129459, Sept. 29, 1998).

A close corporation is essentially an incorporated partnership in which the stockholders consider each other as partners but which the law treats as a corporation. Thus, stockholders in a close corporation are very much like members in a partnership. They owe to one another the same duty of utmost good faith and diligence that partners owe one another. This strict duty applies particularly to controlling stockholders (De Leon, 2010).

Q: San Juan Structural and Steel Fabricators, Inc.’s (San Juan) entered into an agreement with Motorich Sales Corporation (Motorich) for the transfer to it of a parcel of land which was still in the name of ACL Development Corporation. Motorich despite UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE Peculiar characteristic of a close corporation

(drivers' union) and CFTI held negotiations as regards separation benefits that should be awarded in favor of the drivers. They arrived at an agreement. However, individual respondents herein refused to accept theirs. Instead, after disaffiliating themselves from the drivers' union, individual respondents filed a complaint for payment of separation pay due to termination/phase-out. Said complaint was later amended to include CFTI with Antolin T. Naguiat as vice president and general manager, as party respondent. Is Antolin Naguiat liable for payment of separation benefits of employees terminated for authorized causes?

What is outstandingly peculiar with a close corporation is the fact that all the outstanding stock is owned by the persons who are active in the management and conduct of the business (De Leon, 2010). Other characteristics of a close corporation The following are the other characteristics of a close corporation: 1.

2. 3.

4.

5.

6.

7. 8.

Where the AOI provide that the business of the corporation shall be managed by the stockholders themselves rather than by a BOD, then the stockholders shall be deemed to be the directors with all the liabilities imposed by the Code on directors (Sec. 97, CC). The stockholders shall likewise be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance (Sec. 100, CC). Quorum may be greater than mere majority (ibid). Restrictions on transfer of shares can be validly imposed. Right of first refusal can be exercised (Sec. 98, CC). Any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if any of the circumstances on Sec. 101, CC is present. Pre-emptive right extends to all stock issuances, including treasury shares (Sec. 102, CC). Deadlock in the board is settled by the SEC, on the written petition by any stockholder (Sec. 104, CC). A stockholder may withdraw and avail of his right of appraisal (Sec. 105, CC). The rules primarily governing close corporations are set forth under Title XII of the Corporation Code. Other titles of the Code apply suppletorily.

A: Yes. Section 100 of the Corporation Code states that to the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably adequate liability insurance. Nothing in the records show whether CFTI obtained reasonably adequate liability insurance, thus, what remains is to determine whether there was corporate tort. In the present case, Sergio Naguiat is held solidarily liable for corporate tort because he had actively engaged in the management and operation of CFTI, a close corporation (Sergio Naguiat v. NLRC, G.R. No. 116123, March 13, 1997). Close corporation v. Closely-held corporation. CLOSE CORPORATION A close corporation is that defined in Sec. 96. It emphasizes a determination on the part of the participants in the enterprise to keep outsiders from acquiring any interest in the business.

Q: CFTI held a concessionaire's contract with AAFES for the operation of taxi services within Clark Air Base. Sergio Naguiat was CFTI's president, while Antolin T. Naguiat was its vice-president. CFTI was a family-owned corporation. Individual respondents were previously employed by CFTI as taxicab drivers. Due to the phase-out of the US military bases in the Philippines, from which Clark Air Base was not spared, the AAFES was dissolved, and the services of individual respondents were officially terminated. The AAFES Taxi Drivers Association

CLOSELY HELD CORPORATION A closely-held corporation focuses more on the number of shareholders in the corporation at that particular time, indicating that they are few in number.

VALIDITY ON RESTRICTIONS ON TRANSFER OF SHARES Rationale for stock transfer restrictions in close corporations The reason for the stock transfer restriction in close corporation is that the stockholders seek to maintain delectus personae. The close corporation is essentially an incorporated partnership, wherein one of the

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MERCANTILE LAW major objectives of the shareholders is to remain close and be able to prevent changes in the control of the corporation which might otherwise result from the transfer of voting shares (De Leon, 2010).

ISSUANCE OR TRANSFER OF STOCK IN BREACH OF QUALIFYING CONDITION Transfer

Conditions for validity of restrictions on transfer of shares

The term “transfer” as used in Sec. 99, is not limited to a transfer for value. This therefore include donations (Sec. 99[6], CC).

1. Restrictions on the right to transfer shares must appear in the AOI and in the by-laws as well as in the certificate of stock, otherwise they shall not be binding on any purchaser thereof in good faith; and 2. They shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholders with such reasonable terms, conditions, or period stated therein (Sec. 98, CC).

Refusal to register the transfer of stock by a close corporation A close corporation may, at its option, refuse to register the transfer of stock in the name of the transferee if the person is not qualified to be a stockholder and has notice thereof. Any person to whom stock of a close corporation has been issued or transferred has, or is conclusively presumed to have notice: a. That he is a person not eligible to be a holder of stock of the corporation, b. The transfer of stock to him would cause the stock of the corporation to be held by more than the number of persons permitted by its articles of incorporation to hold stock of the corporation, c. The transfer of stock is in violation of a restriction on transfer of stock (Sec. 99 [4], CC).

NOTE: Any transfer made should not result in exceeding the number of stockholders as allowed by the Code.

Exercise of right of first refusal exercised in Sec. 98 The corporation or the stockholders have the right of first refusal, that is, the stockholder who wants to sell his shares to any third person must first offer it either to the corporation or to the other existing stockholders usually under the same terms and conditions. The right pertains to shares already issued to stockholders. If the existing stockholders or the corporation fails to exercise the option to purchase within the period stated, the transferring stockholder may sell his shares to any third person.

Conclusive presumption of knowledge of restrictions There is a conclusive presumption of knowledge of restrictions when the stock certificate issued or transferred conspicuously shows the qualifications of persons entitled to be holders of record; number of persons, not exceeding 20 allowed to be stockholders; and other restrictions as provided in the AOI of the close corporation (Sec. 99 [1],[2],[3], CC).

Option period to exercise the right of first refusal The option period to exercise the right of first refusal is that period stated in the AOI, By-laws and Certificate of Stock. The SEC likewise limits the period to 1 month which is deemed sufficient for the stockholders or for the corporation to signify their desire to buy the shares of stock being offered for sale by any stockholder (SEC Opinion, Oct. 13, 1964).

Stock transfers in violation of the restrictions can still be registered in the books of the Corporation Stock transfers in violation of the restrictions can still be registered in the books of the Corporation in the following cases: 1. If all the stockholders consent; 2. If the AOI of the close corporation was duly amended (Sec. 99 [5], CC).

AOI cannot provide that the consent of the corporation shall be obtained in case the stockholder sells his shares The AOI cannot provide that the consent of the corporation shall be obtained in case the stockholder sells his shares because such restriction is more onerous than the right of first refusal.

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

NOTE: In both the above cases, the corporation will no longer be a close corporation if the conditions under Sec. 96 will no longer be present, as in the case where the transfer results in the presence of more than 20 stockholders.

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CORPORATION CODE Breach of any of these restrictions does not bar rescission by the transferee of the transaction

AMENDMENT OF THE ARTICLES OF INCORPORATION Requirements to be complied with for the amendment of the AOI to delete or remove any provision required for close corporations or to reduce a quorum or voting requirement stated in the AOI

The breach in any of the restrictions shall not in any way impair any right of a transferee regarding any right to rescind the transaction or to recover under any applicable warranty, express or implied (Sec. 99[7], CC).

Any amendment to the articles of incorporation which seeks to delete or remove any provision required for close corporations or to reduce a quorum or voting requirement stated in the articles of incorporation must be: 1. Approved by the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, a. Whether with or without voting rights, or b. A greater proportion of shares as may be specifically provided in the articles of incorporation 2. In a meeting duly called for the purpose.

WHEN BOARD MEETING IS UNNECESSARY OR IMPROPERLY HELD Effect of unnecessary or improperly held board meeting Unless the by-laws of the close corporation otherwise provides, any action by the directors of a close corporation without a meeting shall be valid if: (CKAO) 1. Before or after such action is taken, written Consent is signed by all the directors 2. All the stockholders have actual or implied Knowledge of the action and make no prompt objection 3. The directors are Accustomed to take informal action with the express or implied acquiescence of all the stockholders 4. All the directors have express or implied knowledge of the action in question and make no prompt Objection thereto.

Q: Corporation A, a close corporation, amended its articles of incorporation and removed the provision that all shares of stock, exclusive of treasury stock, shall be held by a specified number of shareholders not exceeding 20. What is the effect of such amendment to Corporation A? A: It is a special feature of a close corporation that its shares of stock exclusive of treasury shares shall be held by not more that 20 stock holders. The deletion of such special feature would render Corporation A, no longer a close corporation.

If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof (Sec. 101, CC).

DEADLOCKS Deadlock in a close corporation It is when the directors or stockholders are so divided respecting the management of the business and affairs of the corporation that the votes required for any corporate action cannot be obtained and as a result, business and affairs can no longer be conducted to the advantage of the stockholders generally (Sec. 104, CC).

SEC can interfere with the management of a close corporation in case of disagreement of the stockholders or directors In case of deadlock in the management of the corporation, the SEC may intervene and can do certain acts which would have not been allowed to do in open corporations.

NOTE: Dissolution of the corporation is one of the possible consequences of deadlock (Sec. 104, CC).

PRE-EMPTIVE RIGHT

Remedy in case of deadlocks in a close corporation

Pre-emptive right in an ordinary corporation v. Pre-emptive right in a close corporation

The SEC may be asked, upon written petition by stockholder, to intervene. And SEC shall have authority to do the following: 1. To arbitrate the dispute 2. Cancel or alter any provision contained in articles of incorporation, by-laws, or stockholder's agreement;

As compared to ordinary corporations, in close corporations, pre-emptive right can be exercised even as to stocks issued for corporate purposes or for payment of a previously contracted debt.

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any the

the any

MERCANTILE LAW 3.

4.

5.

6. 7. 8.

Cancel, alter or enjoin any resolution or act of the corporation or its board of directors, stockholders, or officers; Direct or prohibit any act of the corporation or its board of directors, stockholders, officers, or other persons party to the action; Require the purchase at their fair value of shares of any stockholder, either by the corporation regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders; Appoint a provisional director; Dissolve the corporation; or Grant such other relief as the circumstances may warrant. (ibid.)

Provisional director A provisional director is an impartial person who is neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation. A provisional director has all the rights and powers of a director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the Commission or by all the stockholders. NOTE: A provisional director is not considered as a receiver of the corporation. He does not have the title and powers of a custodian or receiver.

Widely held v. Close corporation

Number of Stockholders Public Offering/ Listing of Shares in the Stock Exchange Who may exercise corporate Powers Qualification of Stockholders Restriction on transfers of shares

Pre-emptive Right

Appraisal Right

WIDELY HELD CORPORATION No limit

CLOSE CORPORATION Not exceeding 20(Sec. 96, CC)

Allowed

Not Allowed (Sec. 96, CC.)

Corporate powers are exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees (Sec. 23, CC)

The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. (Sec. 97, CC) Specific qualifications are usually provided for. ( Sec. 97, CC) There must be a restriction on the transfer of shares (Sec. 96, CC) The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money or for property or personal services, or in payment of corporate debts, unless the AOI provide otherwise. (Sec. 102, CC)

Qualifications of stockholders are not normally prescribed A restriction need not be provided for 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 AOI or 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. (Sec. 39, CC) Only to those cases provided by law under Sec. 42 and 81. Required that the Corporation has unrestricted retained earnings at the time of demand.(Sec. 82, CC)

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Can be exercised with or without reason and regardless of whether the corporation has unrestricted retained earnings.(Sec. 105, CC)

CORPORATION CODE Interference of SEC as to the management of the Corporation’s business.

Dissolution

Amendment of AOI

Objection in a meeting without proper notice

Not allowed. Based on the Business Judgment Rule

Allowed in case of deadlocks. (Sec. 104, CC)

For voluntary dissolutions, approval of majority of the Board of Directors or Trustees and of stockholders representing 2/ 3 of the outstanding capital stock or 2/3 of the members in case of non-stock corporations is necessary. (Sec. 118 and 119, CC.)

Dissolution may be effected by any stockholder upon petition to the SEC whenever any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or whenever corporate assets are being misapplied or wasted. (Sec. 105, CC.) Amendment as to the matters stated in Sec. 103 requires affirmative vote of at least 2/3 of the outstanding capital stock. (Sec. 103, CC) Written objection is required. (Sec. 101, CC.)

Requires vote or written assent of stockholders representing at least 2/3 of the outstanding capital stock (Sec. 16, CC) Oral objection is sufficient to preserve the right of the director to question the validity of an action taken in a meeting held without proper notice. (Sec. 53, CC)

NON-STOCK CORPORATION

Characteristics of a non-stock corporation 1. 2.

DEFINITION Non-stock corporation

3.

It is one where no part of its income is distributable as dividends to its members, trustees or officers. Any profit which it may obtain as an incident to its operations shall whenever necessary or proper, be used in furtherance of the purpose or purposes for which it was organized (Sec. 87, CC).

4. 5.

Foundation A foundation is a non-stock, non-profit corporations with funds established to maintain or aid charitable, religious, educational, athletic, cultural, literary, scientific, social welfare or similar activities primarily through extending grants or endowments. A foundation, as distinguished from an ordinary non-stock corporation requires a minimum capital of 1 million Pesos (SEC Memo. Circular No. 1 Series of 2004).

6.

7.

8.

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It does not have capital stock divided into shares; No part of its income during its existence is distributable as dividends to its members, trustees, or officers; As a general rule, it is not empowered to engage in business with the object of making income or profits directly or indirectly. However, it is not prohibited to make income or profits as an incident to its operation. (Sec. 87, CC) There is non-transferability of membership (Sec. 90, CC) The right to vote of members may be limited, broadened, or even denied in the AOI or the by-laws (Sec. 89, CC). Non-stock corporations may, through their articles of incorporation or their by-laws designate their governing boards by any name other than as BOT (Sec. 138,CC). By-laws may provide that the members may hold their meetings at any place even outside the place where the principal office of the corporation is located, provided that such place is within the Philippines (Sec. 93, CC). A non-stock corporation is not allowed to distribute any of its assets or any incidental income or profit made by the corporation during its existence. Non-availability of conversion into stock corporation (SEC Opinion, February 24, 1989).

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Stock corporation v. Non-stock corporation Existence of Capital Stock

STOCK- CORPORATION Has capital stock divided into shares. (Sec. 3, CC)

Non-stock corporations has capital is in the form of contributions or donations. Not organized for profit.

Purpose

Organized for profit.

Distribution of Profit

Profits are distributed to the stockholders through dividends(Sec. 3, CC)

Number of Directors or Trustees

Not less than 5 but not more than 15.

Term of Office of Directors Election of Officers Place of meeting

Right to vote

Transferability of Shares/ Membership Right to expel members

Distribution of Assets in case of dissolution

NON-STOCK CORPORATION No capital stock.

Except corporation sole and banks (in case of merger or consolidation) which can have a maximum of 21 directors Term of one year until their successors are elected and qualified, subject to the provisions of AOI and By-laws Officers are elected by the BOD and not by the stockholders Stockholders meeting shall be held in city or municipality where the principal office of the corporation is located or at the principal office of the corporation. (Sec. 51, CC). Stockholders can resort to cumulative voting.

Profits are not distributed to members. Any profit earned by the non-stock corporation is used for the furtherance of the purpose or purposes for which it is organized. (Sec. 87, CC) Not less than 5 and may be more than 15 except Non-stock educational institutions (maximum of 15 trustees).

Subject to the provision in AOI and By-laws, 3 years on a staggered basis. Members may directly elect officers. (Sec. 92, CC) May be held at any place outside the principal place of business of the corporation provided it shall be within the Philippines.(Sec. 93,CC) No cumulative voting unless allowed by AOI.

Only preferred and redeemable shares can be denied the right to vote except those matters in Sec. 6.

Right to vote may be limited, broadened or denied by the AOI and by-laws (Sec. 89, CC).

Voting of directors may be made only through general voting. Regional or district voting of directors is not allowed. Shares may be transferred by the stockholder with or without the consent of the corporation. Stockholders may be expelled only for grounds provided by law.

Regional or district voting of trustees is allowed.

Assets of stock corporation shall be distributed in the following order: 1.Payment of claims of creditors who are not stockholders (based on preference of credit) 2.Payment of claims of stockholders as creditors 3.Residual balance is distributed proportionately to preferred shares, if any, then to common stock.

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Membership is personal in character and is not transferable unless allowed by the AOI or by-laws (Sec. 90, CC). Membership shall be terminated in the manner and for the causes provided in the articles of incorporation or the by-laws (Sec. 91, CC). Assets of non-stock corporation shall be distributed as follows: 1. Payment of claims of creditors 2. Assets held on condition of return or subject to limitation of use shall be returned, transferred or conveyed. 3. Distribution to member based on distributive rights stated in AOI or by-law. 4. In case of default, distribution pursuant to Plan of Distribution of Assets.

CORPORATION CODE Conversion

for the cause provided for in the by-laws are not to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual member’s meeting (Tan v. Sycip, G.R. No. 153468, Aug. 17, 2006).

1. A non-stock corporation cannot be converted into a stock corporation through mere amendment of its AOI. This would violate Section 87 which prohibits distribution of income as dividends to members. Giving the members shares is tantamount to distribution of its assets or income (Sundiang, 2014 citing SEC Opinion, March 1995). 2. A non-stock corporation can be converted into a stock corporation only if the members dissolve it first and then organize a stock corporation. However, there is a resulting new corporation (Sundiang, 2014 citing SEC Opinion, May 13, 1992). 3. A stock corporation may be converted into a non-stock corporation by mere amendment provided all the requirements are complied with. Its rights and liabilities will remain (Sundiang, 2014).

PURPOSES Purposes for which a non-stock corporation may be organized Non-stock corporations may be formed or organized for: (CREP-CFLSS) 2. Charitable, 3. Religious, 4. Educational, 5. Professional, 6. Cultural, 7. Fraternal, 8. Literary, 9. Scientific, 10. Social, 11. Civic service, or 12. Similar purposes, like trade, industry, agriculture and like chambers, or any combination thereof (Sec. 88, CC).

Termination of Membership The power to admit members pertains to the Board in the absence of any contrary provisions on the AOI and by-laws. Consistently, it is also the Board who has the power to terminate membership. 1. Standards - A non-stock corporation is authorized to terminate the membership in accordance with the standards fixed in the AIO or the by-laws (Sec. 91). 2. When property rights are involved - Membership may involve property rights. Example: Membership in a golf club where the purchase of the share is a sine qua non (Valley Golf & Country Club Inc. v. Caram, G.R. No. 158805, April 16, 2009). 3. Lien -Non payment of dues may be a ground for termination or suspension of membership. The AOI or the by-laws of a non-stock corporation may provide that unpaid dues shall constitute a lien on the member’s share. However, Section 68 of the Corporation Code does not apply if the membership shares are sold under the provisions that provide for the constitution of lien (Calatagan Golf & Country Club Inc. V. Caram, G.R. No. 165443, April 16, 2009). 4. Notice - For the termination of membership to be valid, there should be reasonable notice to the member concerned and he must be given a fair opportunity to be heard in his defense. 5. Effect of death of a member - Membership in and all rights arising from a non-stock corporation are personal and non-transferable, unless the AOI or the by-laws of the corporation provide otherwise. Deceased members who are dropped from the membership roster in the manner and

NOTE: A non-stock corporation organized to promote educational objectives may not be an educational corporation as contemplated in Secs. 106 to 108, CC.

The formation of a non-stock corporation for political purpose is not allowed Political purpose is not included on the purposes for which a non-stock corporation may be established. SEC may reject the AOI if the purpose of the corporation is to engage in election campaign or partisan political activity (SEC Opinion, April 10, 1985). TREATMENT OF PROFITS Non‐stock corporation may earn profit Mere intangible or pecuniary benefit to the members does not change the nature of the corporation. The fact that a non‐stock corporation earns a profit does not make it a profit‐making corporation where such profit or income is used for purposes set forth in its articles of incorporation and is not distributed to its incorporators, members or officers.

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MERCANTILE LAW NOTE: Due to the enactment of RA 7042, the control test is now used in the determination of nationality of the corporation in case of nationalized or partly nationalized activities. However, this does not preclude the use of other tests in determining the nationality of the corporation. In fact, as per SEC Opinion on Nov. 28, 2009, the SEC opined that the grandfather rule can be useful when a corporation’s economic activity is strictly limited by law to Filipino citizens, such as certain types of retail trading and mass media. Further, according to the commission, the control test, which is more liberal, is applied for corporations intending to engage in commerce where 60%-40% equity ratio is allowed by law.

DISTRIBUTION OF ASSETS UPON DISSOLUTION Order of distribution of assets on dissolution of non-stock corporations 1. All liabilities of the corporation shall be paid or adequate provision thereof shall be made; 2. Assets held upon a condition requiring return, transfer or conveyance upon, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed; 3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes 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. 4. All other assets shall be distributed to the members as provided by the articles of incorporation or the by-laws. 5. In the absence of provision in the AOI or by-laws, distribution may be made in accordance to a plan of distribution adopted by the board of trustees by majority vote and by at least 2/3 of the members (Sec. 94, CC).

2.

Jurisdiction over a foreign corporation IF THE FOREIGN CORPORATION IS THE PLAINTIFF

A non-stock corporation cannot offset unused contributions of members against the balance of receivables from the same members

1. Voluntary appearance before the local courts by the filing of an action by a licensed corporation

The unused contributions of members cannot be offset against the balance of receivables because this would amount to distribution of the capital of the corporation. Members of non-stock corporation are not entitled to distribution of capital. They are only entitled to distribution of capital upon dissolution when it is provided for in the articles of incorporation or by-laws (SEC Opinion, Nov. 27, 1985).

2. If the foreign corporation is a co-plaintiff with a domestic corporation and latter filed a suit here in the Philippines.

FOREIGN CORPORATIONS

A foreign corporation is done, 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, CC).

XPN: A special appearance to file a motion to dismiss based on lack of jurisdiction 2. Service of summons to a foreign corporation which has transacted business in the Philippines whether licensed or registered

BASES OF AUTHORITY OVER FOREIGN CORPORATION Bases of authority or jurisdiction

Features that make a foreign corporation within the coverage of the law

The following are the two bases of authority (jurisdiction) over foreign corporations: 1. A corporation may give actual consent to judicial jurisdiction manifested normally by compliance with the State’s foreign corporation qualification

Place of incorporation - The corporation must be formed, organized, or existing under foreign law.

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

IF THE FOREIGN CORPORATION IS THE DEFENDANT 1. GR: Voluntary appearance of the corporation by interposing a defense

3. Service of summons to its resident agent in an isolated transaction.

Foreign corporation

1.

Principle of reciprocity - It allows Filipino citizens to do business in the foreign state or country. This is merely prescribed as a requirement to secure a license and not an essential element of being a foreign corporation (De Leon, 2010).

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2.

requirements (licensing requirements and other requisites to lawfully transact business in the Philippines); and A corporation, even though not qualified (not licensed), by engaging in sufficient activity (doing business) within the State, established judicial jurisdiction over the foreign corporation. (http://www.repository.law.indiana.edu/cgi/view content.cgi?article=2888&context=ilj: Foreign Corporations: The Interrelation of Jurisdiction and Qualification, Indiana Law Journal, Article 4, Vol. 33, Issue 3, retrieved on April 29, 2013.)

normally incident to and in progressive prosecution of, the purpose and object of its organization. b. Subsequent Test – a foreign corporation is doing business in the country if it is continuing the body or substance of the enterprise of business for which it was organized (Sundiang, supra, 2009, pg. 256). 2. Contract Test - Whether the contracts entered into by the foreign corporation, or by an agent acting under the control and direction of the foreign corporation, are consummated in the Philippines. To be “doing or transacting business in the Philippines” for the purposes of Sec. 133 of the Corporation Code, the foreign corporation must actually transact business in the Philippines, that is, perform specific business transactions within the Philippine territory on a continuing basis, in its own name or for its own account.

CONSENT Through compliance with the Philippines’ legal requirements to lawfully engage in business within the country’s territory, the foreign corporation gives its actual consent to be subjected to the jurisdiction of the Philippines (ibid).

NOTE: Actual transaction of business within the Philippine territory is an essential requisite for the Philippines to acquire jurisdiction over a foreign corporation and thus require the foreign corporation to secure a Philippine business license (B. Van Zuiden Bros., Ltd. v. GTVL Manufacturing Industries, Inc., G.R. No. 147905, May 28, 2007).

By securing a license, which is a legal requirement to lawfully engage in business in the Philippines, the foreign entity would be giving assurance that it will abide by the decisions of our courts, even if adverse to it (Eriks PTE, Ltd. vs. CA, GR 118843, Feb. 6, 1997). Under Sec. 123, CC, foreign corporations shall not be permitted to transact or do business in the Philippines until they have secured a license for that purpose from the SEC and certificate of authority from the appropriate government agency.

Acts which are considered as doing or transacting business in the Philippines for foreign corporations 1.

DOCTRINE OF DOING BUSINESS

2.

Doing business in the Philippines 3.

To be doing or “transacting business in the Philippines” for purposes of Section 133 of the Corporation Code, the foreign corporation must actually transact business in the Philippines, that is, perform specific business transactions within the Philippine territory on a continuing basis in its own name and for its own account (Cargill Inc. v Intra Strata Assurance Corporation, G.R. No. 168266, March 15, 2010).

4.

Soliciting orders, entering into service contracts, and opening offices, whether called “liason” offices or branches. Appointing representatives, distributors domiciled in the Philippines or who stay for a period or periods totaling 180 days or more. Participating in the management, supervision or control of any domestic business, firm, entity, or corporation in the Philippines. Any act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and object of its organization (Sec. 3[d], RA 7042).

Jurisdictional tests of “doing or transacting business” in the Philippines for foreign corporations

Acts which are not considered doing business under the Foreign Investment Act

1. Twin Characterization Test a. Continuity Test – Doing business implies a continuity of commercial dealings and arrangements, and contemplates to some extent the performance of acts or works or the exercise of some functions

1.

2. 3.

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Mere investment as a shareholder by a foreign entity in a foreign corporation duly registered to do business. The exercise of rights as a stock investor and Having a nominee director or officer to represent its interest in such corporation UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW 4.

5. 6.

7.

8.

Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account. Publication of general advertisement through any print or broadcast media Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines. Consignment by a foreign entity of equipment with a local company to be used in the processing of products for export and Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it and similar incidental services (ibid).

determination of whether a foreign corporation is doing business in the Philippines must be judged in light of the attendant circumstances. In this case, it is undisputed that DISI was founded in 1979 and is independently owned and managed by the spouses Leandro and Josephine Bantug. In addition to Steelcase products, DISI also distributed products of other companies including carpet tiles, relocatable walls and theater settings. The dealership agreement between Steelcase and DISI had been described by the owner himself a buy and sell arrangement. This clearly belies DISI’s assertion that it was a mere conduit through which Steelcase conducted its business in the country. From the preceding facts, the only reasonable conclusion that can be reached is that DISI was an independent contractor, distributing various products of Steelcase and of other companies, acting in its own name and for its own account (Steelcase, Inc., v. Design International Selections, Inc., G.R. No. 171995, April 18 2012).

Q: Steelcase is a foreign corporation existing under the laws of Michigan, USA, and engaged in the manufacture of office furniture with dealers worldwide. DISI is a corporation existing under Philippine Laws and engaged in the furniture business, including the distribution of furniture. Steelcase and DISI orally entered into a dealership agreement whereby Steelcase granted DISI the right to market, sell, distribute, install, and service its products to end-user customers within the Philippines. The business relationship continued smoothly until it was terminated after the agreement was breached with neither party admitting any fault. Steelcase filed a complaint for sum of money against DISI alleging, among others, that DISI had an unpaid account of US$600,000.00. DISI alleged that the complaint failed to state a cause of action and to contain the required allegations on Steelcase’s capacity to sue in the Philippines despite the fact that Steelcase was doing business in the Philippines without the required license to do so. Consequently, it posited that the complaint should be dismissed because of Steelcase’s lack of legal capacity to sue in Philippine courts. Is Steelcase doing business in the Philippines without the required license?

NECESSITY OF A LICENSE TO DO BUSINESS Necessity of a license to do business The purpose of the law in requiring that a foreign corporation doing business in the Philippines be licensed to do so is to subject such corporation to the jurisdiction of the courts. The object is not to prevent foreign corporation from performing single acts but to prevent it from acquiring a domicile for the purpose of business without taking steps necessary to render it amenable to suits in local courts (Marshall-Wells Co. vs. Elser & Co., 46 Phil. 71 [1924]). Further, the following are considered objectives of the statutory provisions prescribing regulation of foreign corporations: 1. To place the foreign corporations under the jurisdiction of the court; 2. To place them in the same footing as domestic corporation; 3. To protect the public in dealing with the said corporation. A corporation engaged in exporting goods to the Philippines is not required to obtain a license

A: No. The appointment of a distributor in the Philippines is not sufficient to constitute “doing business” unless it is under the full control of the foreign corporation. If the distributor is an independent entity which buys and distributes products, other than those of the foreign corporation, for its own name and its own account, the latter cannot be considered to be doing business in the Philippines. It should be kept in mind that the UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

If a foreign corporation does not transact such kind of business in the Philippines, even if it exports its products to the Philippines, the Philippines has no jurisdiction to require such foreign corporation to secure a Philippine business license. Actual transaction of business within the Philippine territory is an essential requisite for the Philippines to acquire jurisdiction over a foreign corporation and thus

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CORPORATION CODE require the foreign corporation to secure a Philippine business license (B. Van Zuiden Bros., Ltd. v. GTVL Manufacturing Industries, Inc., G.R. No. 147905, May 28, 2007).

(Cargill, Inc., v. Intra Strata Assurance Corporation, G.R. No. 168266, March 15, 2010).

Q: Cargill is a corporation organized and existing under the laws of the State of Delaware, United States of America. Cargill and Northern Mindanao Corporation (NMC) executed a contract whereby NMC agreed to sell to Cargill molasses provided that Cargill would open a Letter of Credit with the BPI. The amended contract required NMC to put up a performance bond which represents the value of 10,500 metric tons of molasses. The performance bond was intended to guarantee NMC’s performance to deliver the molasses during the prescribed shipment periods according to the terms of the amended contract. In compliance with the terms of the third amendment of the contract, respondent Intra Strata Assurance Corporation (Intra Strata) issued a performance bond to guarantee NMC’s delivery of the 10,500 tons of molasses, and a surety bond. NMC was only able to deliver 219.551 metric tons of molasses out of the agreed 10,500 metric tons. Thus, Cargill sent demand letters to NMC claiming payment under the performance and surety bonds. When NMC refused to pay, Cargill filed a complaint for sum of money against NMC and Intra Strata. Does Cargill, an unlicensed foreign corporation, has legal capacity to sue before Philippine courts?

Requisites for the issuance of license to a foreign corporation

REQUISITES FOR ISSUANCE OF LICENSE

The foreign corporation will submit to SEC the following: 1. Copy of its articles of incorporation and by-laws, certified in accordance with law and their translation to an official language of the Philippines, if necessary. 2. The application, which shall be under oath. 3. Attached to the application for license shall be a duly executed certificate under oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that: a. The laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein NOTE: This oath of reciprocity is one of the requirements to secure a license under Sec. 123, CC, which defines a foreign corporation.

b. The applicant is an existing corporation in good standing. c. If such certificate is in a foreign language, a translation thereof in English under oath of the translator shall be attached thereto. 4. Statement under oath by the President or other person authorized by the Corporation showing to the satisfaction of the SEC and other governmental agency in the proper cases that the a. applicant is solvent and in sound financial condition b. the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the application. 5. An agreement or stipulation stating the designated resident agent who will receive summons and other legal processes for the corporation together with a Special Power of Attorney. 6. An agreement that if it ceases to transact business or if there is no more resident agent, summons shall then be served through SEC; and 7. Deposit securities for the benefit of present and future creditors, within 60 days after the issuance of license.

A: Yes, it has the capacity to sue. In this case, Cargill and NMC amended their contract three times to give a chance to NMC to deliver to Cargill the molasses, considering that NMC already received the minimum price of the contract. There is no showing that the transactions between Cargill and NMC signify the intent of Cargill to establish a continuous business or extend its operations in the Philippines. An exporter in one country may export its products to many foreign importing countries without performing in the importing countries specific commercial acts that would constitute doing business in the importing countries. The mere act of exporting from one’s own country, without doing any specific commercial act within the territory of the importing country, cannot be deemed as doing business in the importing country. The importing country does not require jurisdiction over the foreign exporter who has not yet performed any specific commercial act within the territory of the importing country. Without jurisdiction over the foreign exporter, the importing country cannot compel the foreign exporter to secure a license to do business in the importing country

NOTE: Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to them.

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MERCANTILE LAW AOI and by-laws of a licensed and registered foreign corporation is valid despite the fact that said AOI and by-laws are not approved by SEC

Replacement of a resident agent SEC requires the submission of 1. A duly authenticated copy of board resolution or a certification from the authorized officer of the company formally revoking his appointment as a resident agent of the corporation, 2. Accompanied by a duly authenticated written power of attorney designating the substitute or the new resident agent (SEC Opinion, Sept. 4, 1990).

Since the SEC will grant a license only when the foreign corporation has complied with all the requirements of law, it follows that when it decides to issue such license, it is satisfied that the applicant's by-laws, among the other documents, meet the legal requirements. This, in effect, is an approval of the foreign corporations by-laws (Citibank v Chua, G.R. no. 102300, March 17, 1993).

NOTE: The appointment of a resident agent of a foreign corporation is revocable at any time at the instance of the corporation (ibid).

RESIDENT AGENT

Duty of the resident agent in case it changes its address

Resident agent 1. An individual, who must be of good moral character and of sound financial standing, residing in the Philippines; or 2. A domestic corporation lawfully transacting business in the Philippines (Sec. 127, CC).

It shall be his or its duty to immediately notify in writing the SEC of the new address (Sec. 128, CC). Instances when service of summons or other legal processes made upon the SEC instead of a resident agent

Purpose of appointing a resident agent

1. If a foreign corporation, previously granted a license, ceases to transact business in the Philippines, or 2. Shall be without any resident agent in the Philippines on whom any summons or other legal processes may be served,

The appointment of a resident agent is required for the purpose of accepting and receiving, on behalf of the foreign corporation: 1. Notice affecting the corporation pending the establishment of its local office and 2. Summons and other legal processes in all proceedings for or against the corporation.

then in any action or proceeding arising out of any business or transaction which occurred in the Philippines, service of any summons or other legal process may be made upon the SEC (ibid.)

Effect of service of summons and notices to the resident agent Service upon any agent of a foreign corporation, whether or not engaged in business in the Philippines, constitutes personal service upon the corporation (Sec. 128, CC; Facilities Management Corp. vs. Dela Rosa 89 SCRA 131 [1979]).

Effect of service made upon the SEC Such service made upon the SEC shall have the same force and effect as if made upon the duly authorized officers of the corporation at its home office (ibid).

Resident agent cannot sign the certificate of non-forum shopping

Whenever such service shall be made upon the SEC, it must, within 10 days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. The sending of such copy by the Commission shall be a necessary part of and shall complete such service.

While a resident agent may be aware of the actions filed against the principal, he may not be aware of the actions initiated by the principal, therefore he cannot sign the certificate of non-forum shopping that is a requirement for filing of an initiatory pleading in court (Expert Travel & Tours Inc. v. CA, G.R. No. 152392, May 26, 2005).

PERSONALITY TO SUE Personality to sue by foreign corporations GR: Only foreign corporations that have been issued a license to operate a business in the Philippines have the personality to sue (Sec.133, CC).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE XPN: Under the rule on estoppel, a party is estopped to challenge the personality of a foreign corporation to sue, even if it has no license, after having acknowledged the same by entering to a contract with it.

While an unlicensed foreign corporation doing business in the country cannot maintain any action, said corporation can be sued in the country, under the doctrine of quasi-estoppel by acceptance of benefits. It shall not be allowed to invoke its lack of license to impugn the jurisdiction of the courts (Marubeni Nedeland BV vs. Tensuan, 190 SCRA 105 [1990]; SEC Opinion, Jan. 10, 1995).

One who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence.

INSTANCES WHERE AN UNLICENSED FOREIGN CORPORATION BE ALLOWED TO SUE

A foreign corporation which is not licensed to do business in the Philippines is not absolutely incapacitated from filing a suit in local courts

Instances when unlicensed foreign corporations can sue

Only when that foreign corporation is “transacting” or “doing business” in the country will a license be necessary before it can institute suits. It may, however, bring suits on isolated business transactions, which is not prohibited under Philippine law. Thus, a foreign insurance company may sue in Philippine courts upon the marine insurance policies issued by it abroad to cover international-bound cargoes shipped by a Philippine carrier, even if it has no license to do business in this country. It is the act of engaging in business without the prescribed license which bars a foreign corporation from access to our courts (Divina, supra, pg. 120, citing Aboitiz Shipping Corp. vs. Insurance Co. of North America, 561 SCRA 262).

1. Isolated transactions; 2. A license subsequently granted enables the foreign corporation to sue on contracts executed before the grant of the license; 3. In an action for infringement of patent or other intellectual property rights, provided that the country of the foreign corporation is a party to the Paris Convention. 4. If the foreign corporation is co-plaintiff with a domestic corporation and the domestic corporation is the one who instituted the suit in the Philippines; and 5. By reason of the doctrine of estoppel. Isolated transaction

SUABILITY OF FOREIGN CORPORATIONS

The Court has not construed the term “isolated transaction” to literally mean “one” or a mere single act. The phrase “isolated transaction” has a definite and fixed meaning, i.e., a transaction or series of transaction set apart from the common business of a foreign enterprise in the sense that there is no intention to engage in progressive pursuit of the purpose and object of the business organization (Lorenzo Shipping Corp., vs. Chubb and Sons, 431 SCRA 266 [2004]).

A foreign corporation, which was granted a license to transact business in the Philippines, is suable before local courts or administrative agencies It is suable since any foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class, save and except: 1. Such only as provide for the creation, formation, organization or dissolution of the corporations or 2. Such as fix the relations, liabilities, responsibilities, or duties of stockholders, members or officers of corporations to each other or to the corporation (Sec. 129, CC).

Q: May a foreign corporation not engaged in business in the Philippines and a national of a country which is a party to any convention, treaty, or agreement relating to intellectual property rights or the repression of unfair competition, to which the Philippines is also a party or extend reciprocal rights sue in trademark or service mark enforcement action?

NOTE: Matters relating to the organization or internal affairs of the corporation are governed by the laws of the home or incorporating State unless they offend any public policy of the Philippines.

A: Yes, the foreign corporation mentioned above may sue in trademark or service mark enforcement action. This is in accordance with Section 160, in relation to Section 3 of R.A. No. 8393, The Intellectual Property Code (Sehwani Inc. v. In‐n‐Out Burger, G.R. No. 171053, Oct. 15, 2007).

A foreign corporation without any license, engaged in doing business in the Philippines, may be sued in the country

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MERCANTILE LAW Q: Surecomp, a foreign corporation duly organized and existing under the laws of the Netherlands, entered into a software license agreement with ABC, a domestic corporation, for the use of its IMEX Software System (System) in the bank’s computer system for a period of twenty (20) years. ABC merged with Global Business Holdings, Inc. (Global), with Global as the surviving corporation. When Global took over the operations of ABC, it found the System unworkable for its operations, and informed Surecomp of its decision to discontinue with the agreement and to stop further payments thereon. Consequently, for failure of Global to pay its obligations under the agreement despite demands, Surecomp filed a complaint for breach of contract with damages before the RTC. In its complaint, Surecomp alleged that it is a foreign corporation not doing business in the Philippines and is suing on an isolated transaction. Pursuant to the agreement, it installed the System in ABC’s computers for a consideration of US$298,000.00 as license fee. Global filed a motion to dismiss on the ground that Surecomp had no capacity to sue because it was doing business in the Philippines without a license. Is Global is estopped from questioning Surecomp’s capacity to sue?

Holdings, Inc., v. Surecomp Software, B.V., G.R. No. 173463, October 13, 2010). GROUNDS FOR REVOCATION OF LICENSE Grounds for revocation of license of a foreign corporation Without prejudice to other grounds provided by special laws, the license of a foreign corporation to transact business in the Philippines may be revoked or suspended by the SEC upon any of the following grounds: 1. Failure to file its annual report or pay any fees as required by the Code; 2. Failure to appoint and maintain a resident agent in the Philippines; 3. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a statement of such change; 4. Failure to submit to the SEC an authenticated copy of any amendment to its articles of incorporation or by-laws 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 this Title; 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 subdivisions; 7. Transacting business in the Philippines outside of the purpose or purposes for 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; or 9. Any other ground as would render it unfit to transact business in the Philippines (Sec 134, CC).

A: Yes, Global is estopped. As a rule, unlicensed foreign non-resident corporations doing business in the Philippines cannot file suits in the Philippines. This is mandated under Section 133 of the Corporation Code. A corporation has a legal status only within the state or territory in which it was organized. For this reason, a corporation organized in another country has no personality to file suits in the Philippines. In order to subject a foreign corporation doing business in the country to the jurisdiction of our courts, it must acquire a license from the Securities and Exchange Commission and appoint an agent for service of process. Without such license, it cannot institute a suit in the Philippines. The exception to this rule is the doctrine of estoppel. Global is estopped from challenging Surecomp’s capacity to sue. A foreign corporation doing business in the Philippines without license may sue in Philippine courts a Filipino citizen or a Philippine entity that had contracted with and benefited from it. A party is estopped from challenging the personality of a corporation after having acknowledged the same by entering into a contract with it. The principle is applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes, chiefly in cases where such person has received the benefits of the contract (Global Business UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Revocation of the license to transact business in the Philippines A certificate of revocation shall be issued by the SEC. A copy thereof shall be furnished to the appropriate government agency in the proper cases. The SEC shall also mail to the corporation at tits registered office in the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation. (Sec. 135, CC.)

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CORPORATION CODE Effects of revocation of license of a foreign corporation

corporation for which the lessor merely receives rental paid by the lessee. This is similar to the sale of assets, except that under a lease, nothing passes, except the right to use the property leased. 3. Sale of stock – The purpose of a holding corporation is to acquire a sufficient amount of the stock of another corporation for the purpose of acquiring control. The acquiring corporation is called the parent/ holding company. The corporation whose stocks were acquired is the subsidiary. 4. Merger – One where a corporation absorbs another corporation and remains in existence while others are dissolved. 5. Consolidation - One where a new corporation is created and consolidating corporations are extinguished (ibid., 656-661).

The following are the effects of such revocation: 1. The revocation cannot affect the validity of contracts entered into by it before the revocation nor its right to maintain an action to enforce them (Billmeyer Lumber Co. vs. Merchants’ Coal Co., 69 SE 1073). 2. The revocation shall not affect the validity of contracts entered into by a foreign corporation after revocation. The only effect of the revocation is that the foreign corporation cannot seek redress from the courts to enforce such contracts. It simply removes its legal standing to sue (SEC Opinion No. 10-07, Feb. 5, 2010). 3. Innocent parties can enforce such contracts whether the same are considered valid or not. However, the foreign corporation can no longer transact business in the Philippines, and it cannot maintain any suit or action in any court or administrative agency (Sec. 133, CC).

Merger Two or more corporations unite, one corporation which retains its corporate existence absorbing or merging in itself the other which disappears as a separate corporation. It is the absorption of one corporation by another which survives (De Leon, 2010).

Withdrawal by foreign corporation licensed to transact business in the Philippines from said license A foreign corporation licensed to transact business in the Philippines may be allowed to withdraw from the Philippines by filing a petition for withdrawal of license. However, no certificate of withdrawal shall be issued by the SEC unless all the following requirements are met: 1. All claims which have accrued in the Philippines have been paid, compromised or settled; 2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the Philippine Government or any of its agencies or political subdivisions have been paid; and 3. The petition for withdrawal of license has been published once a week for three (3) consecutive weeks in a newspaper of general circulation in the Philippines (Sec. 136, CC)

Consolidation Two or more corporations unite, giving rise to a new corporate body and dissolving the constituent corporations which cease to exist as separate corporations (De Leon, 2010). Merger v. Consolidation

Definition MERGERS AND CONSOLIDATIONS DEFINITION AND CONCEPT Common forms of corporate combinations

Consequent dissolution of a corporation or corporations

1. Sale of assets – One corporation sells all or substantially all of its assets to another. Such sale, usually, though not necessarily made in the course of the dissolution of the vendor corporation. 2. Lease of assets – A corporation, without being dissolved, leases its property to another

Consequent creation of a new

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MERGER One where a corporation absorbs another corporation and remains in existence while others are dissolved (Sec. 76, CC). All of the constituent corporations involved are dissolved except one No new corporation is created

CONSOLIDATION One where a new corporation is created and consolidating corporations are extinguished. (Sec. 76, CC) All consolidated corporations are dissolved without exception A new corporation emerges

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW single corporation called consolidated corporation (BPI vs. BPI-Employees Union-Davao Chapter Federation of Unions in BPI Unibank, GR 164301, Aug. 10, 2010, J. Brion, dissenting).

corporation

Acquisition of Assets, Liabilities, Capital Stock

The surviving corporation acquires all the assets, liabilities, and capital stock of all constituent corporations

All assets, liabilities, and capital stock of all consolidated corporations are transferred to the new corporation

PLAN OF MERGER OR CONSOLIDATION Plan of merger or consolidation The plan of merger or consolidation is a plan created by the representatives of the constituent corporations, providing for the details of such merger.

A partnership cannot merge or to consolidate with a corporation Only corporations can merge or consolidate into a single corporation. Hence, a partnership may NOT be allowed to merge with a corporation but the partnership may transfer all its assets and liabilities to the corporation which will issue its shares of stock to be distributed to the partners in proportion to their respective interest in the partnership, provided the partnership shall be dissolved in accordance with the Civil Code (De Leon, supra, pg. 656, citing SEC Opinion, Jan 3, 1984).

Contents of a plan of merger or consolidation The BOD/ BOT of each corporation party to the merger or consolidation must set forth the following in their plan of merger or consolidation: 1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; 2. The terms of the merger or consolidation and the mode of carrying the same into effect; 3. A statement of the changes, if any, in the AOI of the surviving corporation in case of a merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the AOI for corporations organized under the CC; and 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable (Sec. 76, CC).

Q: Where one corporation sells or otherwise transfers all of its assets to another corporation, is the latter liable for the debts and liabilities of the transferor? A: GR: No. XPNs: 1. Where the purchaser expressly or impliedly agrees to assume such debts; 2. Where the transaction amounts to a consolidation or merger of the corporations; 3. Where the purchasing corporation is merely a continuation of the selling corporation; and 4. Where the transaction is entered into to fraudulently to escape liability for such debts (Edward J. Nell Co. vs. Pacific Farms, Inc., 15 SCRA 415 [1965]).

Approvals required for an effective plan of merger or consolidation The plan of merger or consolidation must be approved by majority vote of each of the BOD/ BOT of the constituent corporation. Thereafter, it shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose. The affirmative vote of the stockholders representing at least 2/3 of the outstanding capital stock of each corporation in the case of stock corporations or at least 2/3 of the members in the case of non-stock corporations, shall be necessary for the approval of such plan (Sec. 77, CC).

CONSTITUENT v. CONSOLIDATED CORPORATION Constituent corporation The parties to a merger or consolidation are constituent corporations (McLeod vs. NLRC, 512 SCRA 222, [2007]).

Amendment of a plan of merger or consolidation Consolidated corporation Any amendment may be made, provided such amendment is approved by majority vote of the respective BOD / BOT of all the constituent corporations and ratified by the affirmative vote of

Sec. 76 of the CC authorizes two or more corporations to merge under one of the participating constituent corporations, or to consolidate into a new UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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CORPORATION CODE stockholders representing at least 2/3 of the outstanding capital stock or 2/3 of the members of each of the constituent corporations (ibid).

board members of trustees and stockholders or members required for the original plan. 7. After such approval, Articles of Merger or Articles of Consolidation shall be executed by each of the constituent corporations, signed by president or VP and certified by secretary or assistant secretary, setting forth: a. Plan of merger or consolidation; b. In stock corporation, the number of shares outstanding; in non-stock, the number of members; and c. As to each corporation, number of shares or members voting for and against such plan, respectively. 8. Four copies of the Articles of Merger or Consolidation shall be submitted to the SEC for approval. Special corporations like banks, insurance companies, building and loan associations, etc., need the prior approval of the respective government agency concerned. 9. If SEC is satisfied that the merger or consolidation is not inconsistent with the provisions of the Corporation Code and existing laws, it shall issue the Certificate of Merger or the Certificate of Incorporation, as the case may be. 10. If, upon investigation, the SEC has reason to believe that the proposed merger or consolidation is contrary to or inconsistent with the Corporation Code or other existing laws, it shall set a hearing to give the corporations the opportunity to be heard and written notice of said hearing shall be given to each constituent corporation at least two weeks prior to the said hearing (Secs. 76-79, CC).

NOTE: Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation.

Appraisal right is available to a dissenting stockholder to a plan of merger or consolidation Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with this Code: Provided, that if after the approval by the stockholders of such plan, the BOD should decide to abandon the plan, the appraisal right shall be extinguished. (ibid.) ARTICLES OF MERGER OR CONSOLIDATION After approval of the plan of merger or consolidation, an article of merger or consolidation is executed by each of the constituent corporations to be signed by the president or vice-president of the each corporation and signed by their secretary or assistant secretary setting forth: 1. The plan of the merger or the plan of consolidation 2. As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members 3. As to each corporation, the number of shares or members voting for and against such plan, respectively (Sec. 78, CC). PROCEDURE

EFFECTIVITY

1. Board of each corporation shall draw up a plan of merger or consolidation. 2. 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 or consolidation shall be submitted for approval by the stockholders or members of each such corporation at separate corporate meetings duly called for the purpose. Notice should be given to all stockholders or members at least two (2) weeks prior to date of meeting, either personally or by registered mail. 4. Affirmative vote of 2/3 of the outstanding capital stock in case of stock corporations, or 2/3 of the members of a non-stock corporation shall be required. 5. Dissenting stockholders may exercise the right of appraisal. But if Board abandons the plan to merge or consolidate, such right is extinguished. 6. The plan may still be amended before the same is filled with the SEC; however, any amendment to the plan must be approved by the same votes of the

Effectivity of merger or consolidation The merger or consolidation shall become effective upon issuance by the SEC of the certificate of merger and consolidation (Sec. 79, CC). In the case of merger or consolidation of banks or banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, the favorable recommendation of the appropriate government agency shall first be obtained (ibid). Q: FISLAI and DSLAI entered into a merger, with DSLAI as the surviving corporation. The articles of merger were not registered with the SEC due to incomplete documentation. DSLAI changed its corporate name to MSLAI. The business of MSLAI, however, failed. Prior to the closure of MSLAI,

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MERCANTILE LAW Remedios Uy filed an action for collection of sum of money against FISLAI. The RTC ruled in favor of Uy and hence, six (6) parcels of land owned by FISLAI were sold to Willkom, the highest bidder. MSLAI filed a complaint for annulment of sheriff’s sale. Willkom, et al., averred that MSLAI had no cause of action against them or the right to recover the subject properties because MSLAI is a separate and distinct entity from FISLAI. They further contended that the “unofficial merger” between FISLAI and DSLAI (now MSLAI) did not take effect considering that the merging companies did not comply with the formalities and procedure for merger or consolidation as prescribed by the Corporation Code of the Philippines. Was the merger between FISLAI and DSLAI (now MSLAI) valid and effective?

LIMITATIONS Limitations with regard to merger or consolidation of corporations Subject to the limitations provided by the Constitution, the merger or consolidation should not create illegal combinations nor create monopolies and it should not eliminate free and healthy competition. Monopoly A "monopoly" embraces any combination tendency of which is to prevent competition in broad and general sense, or to control prices to detriment of the public (Gokongwei v SEC, G.R. L-45911 April 11, 1979). EFFECTS

A: No. The merger was not valid. Merger, does not become effective upon the mere agreement of the constituent corporations. Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law authorizing them. The merger shall only be effective upon the issuance of a certificate of merger by the SEC, subject to its prior determination that the merger is not inconsistent with the Corporation Code or existing laws. In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not registered with the SEC due to incomplete documentation. Consequently, the SEC did not issue the required certificate of merger. Even if it is true that the Monetary Board of the Central Bank of the Philippines recognized such merger, the fact remains that no certificate was issued by the SEC. Such merger is still incomplete without the certification. The issuance of the certificate of merger is crucial because not only does it bear out SEC’s approval but it also marks the moment when the consequences of a merger take place. By operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist but its rights and properties, as well as liabilities, shall be taken and deemed transferred to and vested in the surviving corporation (Mindanao Savings and Loan Association, Inc., et al., v. Edward Willkom, et al., G.R. No. 178618, October 11, 2010).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

the the the No.

Effects of a merger or consolidation The effects of merger or consolidation are: 1. The constituent corporations shall become a single corporation which: 2. In case of merger, shall be the surviving corporation designated in the plan of merger 3. In case of consolidation, shall be the consolidated corporation designated in the plan of consolidation 4. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation 5. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code 6. The surviving or the consolidated corporation shall thereupon and thereafter possess: 7. All the rights, privileges, immunities and franchises of each of the constituent corporations 8. All property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation 9. These shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed 10. The surviving or consolidated corporation shall: a. Be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations

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CORPORATION CODE b. Any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation c. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation (CC, Sec. 80; BPI vs. Lee, GR 190144, Aug. 1, 2012). Q: Associated Banking Corporation and Citizens Bank and Trust Company (CBTC) merged to form just one banking corporation known as Associated Citizens Bank, the surviving bank. The Associated Citizens Bank changed its corporate name to Associated Bank by virtue of the Amended Articles of Incorporation. Lorenzo Sarmiento executed in favor of CBTC a promissory note. Upon maturity and despite repeated demands Sarmiento failed to pay the amount due. Associated Bank file a collection suit against Sarmiento. Sarmiento contends that Associated Bank is not the proper party in interest because the promissory note was executed in favor of Associated Citizens Bank. The trial court ordered Sarmiento to pay. The CA however, held that the Associated Bank had no cause of action against Lorenzo Sarmiento Jr., since said bank was not privy to the promissory note executed by Sarmiento in favor of Citizens Bank and Trust Company (CBTC). The court ruled that the earlier merger between the two banks could not have vested Associated Bank with any interest arising from the promissory note executed in favor of CBTC after such merger. May Associated Bank, the surviving corporation, enforce the promissory note made by Sarmiento in favor of CBTC, the absorbed company, after the merger agreement had been signed A: Yes. Associated Bank may enforce the promissory note. Ordinarily, in the merger of two or more existing corporations, one of the combining corporations survives and continues the combined business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation. Although there is a dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation of their assets, because the surviving corporation automatically acquires all their rights, privileges and powers, as well as their liabilities. All contracts of the absorbed corporations, regardless of the date of execution shall pertain to the surviving corporation.

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MERCANTILE LAW backing it are assets such as loans, leases, credit card debt, a company’s receivables, royalty and so on, and not mortgage-based securities, hence, the risk involved in ABS is greater.

SECURITIES REGULATION CODE STATE POLICY, PURPOSE

2. Other instruments as may in the future be determined by the SEC. 3. Derivatives– options and warrants

Nature of the Securities Regulation Code (SRC) The SRC is the law that regulates securities (its issuance, distribution and sale) and the person who deals with such securities. It is enacted to protect the public from unscrupulous promoters, who stake business or venture claims which have really no basis, and sell shares or interests therein to investors. The SRC also serves to protect investors, promote investor confidence, and stabilize the financial markets.

NOTE: 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 (Sundiang, 2014). Kinds of Options a. Call option - option to buy b. Put option - option to sell c. Straddle - combination of both call and put option

The law does not guarantee that a person who invest in securities will make money. The law only ensures that there will be a fair and full disclosure of information regarding securities so that the investor could make an informed judgment (Dean Divina’s Lecture, 2014).

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.

State policy with regard to the SRC 1. 2. 3. 4. 5. 6. 7.

4. Investments instruments – Investment contracts, fractional undivided interests in oil, gas, or other mineral rights

Establish a socially-conscious free market that regulates itself Encourage widest participation of ownership in enterprises Enhance democratization of wealth Promote development of the capital market Protect investors Ensure full and fair disclosure about securities Minimize, if not totally eliminate, insider trading and other fraudulent or manipulative devices and practices which creates distortion in the free market.

NOTE: Investment contract - An investment contract is a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. Howey Test For an investment contract to exist, the following elements must concur: a. A contract, transaction or scheme; b. An investment of money; c. Investment is made in a common enterprise; d. Expectation of profits e. Profits arissing primarily from the effort of others

SECURITIES REQUIRED TO BE REGISTERED Securities (1996 Bar Question) Securities are shares, 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: (DO DIET)

Network marketing, a scheme adopted by companies for getting people to buy their products outside the usual retail system where products are brought from the store’s shelf and where the buyer can become a down-line seller, earning commissions from purchases made by new buyers whom he refers to the person who sold the product to him, is not an investment contract. The commissions are incentives to down-line sellers to bring in other customers. These can hardly be regarded as profits from investment of money under the Howey Test (SEC v. Prosperity.Com, Inc., 664 SCRA 28, 2012).

1. Debt instruments – bonds, debentures, notes, evidence of indebtedness, asset-backed securities NOTE: Asset-backed securities (ABS) - These are financial securities the value of which depends on the assets underlying it. For investors, ABS are alternative to investing in corporate debt. An ABS is essentially the same thing as a mortgage-backed security, except that the securities UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

5. Equity instruments – Shares of stock, certificates of interest or participation in a profit sharing

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SECURITIES REGULATION CODE agreement, certificates of deposit for a future subscription, proprietary or non-proprietary membership certificates in corporations 6. Trust instruments – Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments (Sec. 3, SRC).

entity. Since the checks in this case were generally rolled over to augment the creditor’s existing investment with ASBHI, they most definitely take on the attributes of traditional stocks. A different rule would open the floodgates for a similar scheme, by companies without prior license or authority from the SEC. This cannot be countenanced (Gabionza v. CA, G.R. No. 161057, September 12, 2008).

Q: Betty Go Gabionza and other investors lent, invested or deposited money with ASBHI. For this, ASBHI issued two (2) postdated checks to its lenders, one representing the principal amount and the other covering the interest thereon. On the maturity of the checks, the individual lenders renewed the loans, either collecting only the interest earnings or rolling over the same with the principal amounts. After sometime, DBS Bank refused to pay for the checks by virtue of “stop payment” orders from ASBHI. The series of events led to the filing of the complaints by Gabionza, et al., for estafa under Article 315(2)(a) and (2)(d) of the Revised Penal Code, estafa under Presidential Decree No. 1689, violation of the Revised Securities Act and violation of the General Banking Act. The DOJ concluded that ASHBHI, et al., are liable for violating such prohibition against the sale of unregistered securities. However, the CA reversed the DOJ holding that the postdated checks issued by ASBHI did not constitute a security under the Revised Securities Act. Are the checks issued by ASHBHI “securities”?

Test on determining whether or not it is a security The test is: Does it represent a share, participation, or interest interest in a commercial enterprise or any profit making venture? If yes, then, it is a security. If it is a security, then, it cannot be sold, or offered for sale or distribution within the Philippines without a registration statement duly filed with and approved by the SEC (Dean Divina’s Lecture, 2014). Requirement before securities are sold or offered for sale or distribution within the Philippines They are required to be registered with and approved by the SEC. Registration also includes the disclosure to SEC of all material and relevant information about the issuer of the security. Prior to the sale, the information on the securities, in such form and with such substance as the SEC may prescribe, shall be made available to each prospective purchaser (Sec. 8, SRC).

A: Yes. The checks issued constitutes securities, hence, the non-registration thereof is a violation of the Revised Securities Act. It is one thing for a corporation to issue checks to satisfy isolated individual obligations, and another for a corporation to execute an elaborate scheme where it would comport itself to the public as a pseudo-investment house and issue postdated checks instead of stocks or traditional securities to evidence the investments of its patrons. The Revised Securities Act was geared towards maintaining the stability of the national investment market against activities such as those apparently engaged in by ASBHI. ASBHI adopted this scheme in an attempt to circumvent the Revised Securities Act, which requires a prior license to sell or deal in securities.

Reason for registration requirement

It bears pointing out that the definition of “securities” set forth in Section 2 of the Revised Securities Act includes “commercial papers evidencing indebtedness of any person, financial or non-financial entity, irrespective of maturity, issued, endorsed, sold, transferred or in any manner conveyed to another.” A check is a commercial paper evidencing indebtedness of any person, financial or non-financial

The issuer would be penalized. Issuers of securities not registered shall be subjected to criminal, civil and administrative charges.

The reason for the registration requirement is to protect the public from fraud. Exceptions to the registration requirement The following need not be registered: 1. Exempt securities 2. Securities sold in exempt transactions. However, as an exception to the above exceptions, SRC provides that the resale of securities previously sold in an exempt transaction must be registered. Effect of non-registration

Q: Timeshare Corp. sold to Spouses Cortez, one timeshare of Laguna de Boracay. After sometime, the SEC issued a resolution to the effect that Timeshare Corp. was without authority to sell

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MERCANTILE LAW securities, like timeshares. It held therefore that the purchaser may exercise the option to unilaterally rescind the purchase agreement and receive the refund of money paid applies to all purchase agreements entered into by Timeshare Corp. prior to the effectivity of the Registration Statement. Hence, Spouses Cortez demanded their right to cancel their contract, as it appears that Laguna de Boracay is selling said shares without license or authority from the SEC. Despite repeated demands, Timeshare Corp. failed and refused to refund the same. Timeshare Corp. contends that its mere registration as a corporation already authorizes it to deal with unregistered timeshares. Does the registration of Timeshare Corp. as a corporation authorize it to deal with unregistered timeshares?

Securities market professionals (persons who deal with securities) They are the broker, dealer, associated person of a broker or dealer, and a salesman. 1. Broker - A person engaged in the business of buying and selling securities for the account of others (Sec.3.3, SRC). 2. Dealer - Any person who buys and sells securities for his/her own account in the ordinary course of business (Sec. 3.4, SRC). 3. Associated person of a broker or dealer - He is an employee of a broker or dealer who directly exercises control of supervisory authority but does not include a salesman, or an agent, or a person, whose functions are solely clerical or ministerial (Sec. 3.5, SRC). 4. Salesman - He is a natural person, employed as such, or as an agent, by a dealer, issuer or broker to buy and sell securities; but for the purpose of registration, shall not include any employee of an issuer whose compensation is not determined directly or indirectly on sales of securities of the issuer.

A: No. Mere registration as a corporation does not authorize it to deal with unregistered timeshares. Corporate registration is just one of several requirements before it may deal with timeshares. Prior to fulfillment of all the other requirements of Section 8, Timeshare Corp. is absolutely proscribed from dealing with unregistered timeshares No securities, except of a class exempt under the SRC or unless sold in any transaction exempt under the same, shall be sold or offered for sale or distribution to the public within the Philippines unless such securities shall have been registered and permitted to be sold as provided by the SRC (Timeshare Realty Corporation v. Cesar Lao, G.R. No. 158941, February 11, 2008).

Obligation of the broker to his client The primary obligation of the broker is to ensure his account’s compliance with the law (Abacus Securities Corp. v. Ampil, G.R. No. 160922, Feb. 27, 2006). NOTE: Since a brokerage relationship is essentially a contract for the employments of an agent, the law on contracts govern the broker-principal relationship.

Validity of the sale of shares acquired 12 months after the approval of the Registration Statement

Registration of security market professionals If the person who acquired the security did so after the issuer has made generally available to its security holders an income statement covering a period of at least twelve months beginning from the effective date of the registration statement the right of recovery shall be conditioned on proof that the person who acquired the security relying upon such untrue statement in the registration statement or relying upon the registration statement and not knowing of such income statement, but such reliance may be established without proof of the reading of the registration statement by such person (Sec. 56, SRC).

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Security market professionals are required to be registered. No broker shall sell any securities unless he is registered with the SEC (Sec. 19, Revised Securities Act) (Nicolas vs. CA, et al.,G.R. No. 12285, Mar. 27, 1998) Q: Can a stock broker without license from the SEC, recover management fees allegedly earned from handling the securities transactions of a client? A: No. An unlicensed person may not recover compensation for services as a broker where a statute or ordinance is applicable and such is of a regulatory nature.

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SECURITIES REGULATION CODE EXEMPT SECURITIES

4. Distribution by the corporation of Securities to its stock holders or other security holders as stock dividends or distribution out of surplus 5. Sale of CApital stock of a corporation to its own stockholders exclusively wherein no commission or remuneration is paid or given directly or indirectly in connection with the sale of such capital stock

Exempt securities (PC-RIBO) 1. 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. 2. 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 SEC may require compliance with the form and content of disclosures the Commission may prescribe. 3. Certificates issued by a Receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. 4. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of Insurance Commission, Housing and Land Use Regulatory Board, or the Bureau of Internal Revenue. 5. Any security issued by a Bank except its own shares of stock (which serves to promote the sale of securities issued by heavily regulated banks). 6. Other securities as determined by the SEC by rule or regulation, after public hearing.(Sec. 9, SRC)

NOTE: Also, this sale must not involve an underwriter or financial advisor

6. Bonds or notes secured by a mortgage upon Real estate or tangible personal property, where the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale 7. Issue and delivery of any security in exchange for any other security of the same Issuer pursuant to the right of conversion entitling the holder of the security surrendered in exchange to make such conversion. 8. Broker’s transactions executed upon customer’s Orders, on any registered Exchange or other Trading market 9. Share Subscriptions in capital stock prior to incorporation or in pursuance of an increase in its authorized capital stock under the Corporation Code when no expense is incurred, or no commission, compensation or renumeration 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 subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased. 10. EXchange of securities by the issuer with its existing security holders exclusively, when no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange 11. Sale by issuer to fewer than 20persons in the Philippines during any 12 month period, otherwise known as private placement transactions 12. Sale of securities to any number of the following Qualified Buyers: a. banks, b. registered investment houses, c. insurance companies, d. pension funds or retirement plans maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions, investment companies, and e. other persons or entities ruled qualified by the SEC on the basis of such factors such as financial sophistication, net worth, knowledge, and experience in financial and business matters, or

Note: Being an issuer of an exempt security does NOT exempt such issuer from the requirement of submission of reports under the regime of full and fair disclosure.

Rationale for the exemption of securities from registration The reason for the exemption of these enumerated securities from registration is that they are either guaranteed by the government or they are already regulated by another government agency or body other than the SEC. EXEMPT TRANSACTIONS Exempt transactions (JuDe ISCaRIOT’S Ex-20-QB’s) 1. Any JUdicial sale, or sale by an executor, administrator, guardian, receiver or trustee in insolvency or bankruptcy 2. Those sold by a pledge holder, mortgagee, or any other similar lien holder, to liquidate a bona fide debt a security pledged in good faith as security for such DEbt 3. Those sold or offered for sale in an Isolated transaction for the owner’s account and the owner not being an underwriter

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MERCANTILE LAW amount of SRC).

assets under management (Sec. 10.1,

f. Corporate secretary or persons performing similar functions NOTE: It shall be accompanied by a duly verified resolution of the Board of Directors of the issuer corporation.

Rationale behind exempt transactions Although the securities themselves must still be registered, the sale or issue need not be registered because the investors involved herein are considered as highly sophisticated investors or specialized investors and as such, have a greater risk tolerance or do not need strict protection from the Commission.

5. Written consent of Expert – The written consent of the expert named as having certified any part of the registration statement or any document used in connection therewith shall also be filed 6. Certification by Selling stockholders– Where the registration statement includes shares to be sold by the selling shareholders, a written certification by such selling shareholders as to the accuracy of any part of the registration statement contributed by such selling shareholders shall also be filed 7. Fees – Upon filing of the registration statement, the issuer shall pay to the SEC a fee of not more than one tenth of one percent (1/10 of 1%) of the maximum aggregate price at which such securities are proposed to be offered; the SEC shall prescribe by rule, diminishing the fees in inverse proportion, the value of the aggregate price of the offering

List of exempt transactions under SRC is not exclusive The list of exempt transaction under the SRC is not exclusive because under Section 10.2 of Republic Act 8799, the Commission may exempt other transactions, if it finds that the requirements of registration under the Code is not necessary in the public interest or for the protection of the investors such as by reason of the small amount involved or the limited character of the public offering.

NOTE: This fee paid to the SEC is called a diminishing fee.

PROCEDURE FOR REGISTRATION OF SECURITIES

8. Notice and Publication – Notice of the filing of the registration statement shall be immediately published by the issuer, at its own expense, in two newspapers of general circulation in the Philippines; once a week for two consecutive weeks, or in such other manner as the Commission by rule shall prescribe, reciting that: a. A registration statement for the sale of such security has been filed, and b. The aforesaid registration statement as well as the papers attached thereto is open to inspection at the Commission during business hours. c. Copies thereof, photo static or otherwise, shall be furnished to interested parties at such reasonable charges as the Commission may prescribe. 9. RULing– Within 45 days after the date of the filing of the registration statement, or by such later date to which the issuer has consented, the SEC shall declare the registration statement effective or rejected, unless the applicant is allowed to amend the registration statement. The Commission shall enter an order declaring the registration statement to be effective if it finds that the registration statement together with all the other papers and documents attached thereto is on its face complete and that the requirements have been complied with. The Commission may also impose such terms and conditions as may be necessary or appropriate for the protection of the investors.

Purpose for registration of securities Registration of securities allows the subsequent release of these securities to the investing public and serves to protect investors. Procedure for registration of securities (A- POSECsFP- RulE) 1. Application – All securities required to be registered shall be registered through the filing by issuer with SEC, of a sworn registration statement with respect to such securities in such form and containing such information or documents as the Commission shall prescribe. 2. Prospectus – The registration statement shall include any prospectus required or permitted to be delivered; 3. Other information– The information required for the registration of any kind and all securities shall include, among others, the effect of the securities’ issue on ownership, on the mix of ownership, especially foreign and local ownership; 4. Signatories to registration statement– The registration statement shall be signed by the issuer’s: a. Executive officer b. Principal operating officer c. Principal financial officer d. Comptroller e. Principal accounting officer UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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SECURITIES REGULATION CODE 10. Effectivity – Upon effectivity of the registration statement, the issuer shall state under oath in every prospectus that all registration requirements have been met and that all information are true and correct as represented by the issuer or the one making the statement.

4.

NOTE: The Commission may compel the production of all the books and papers of the issuer, and may administer oaths to, and examine the officers of such issuer or any other person connected therewith as to its business and affairs.

NOTE: Any untrue statement or fact of omission to state a material fact required to be stated therein or necessary to make the statement therein not misleading shall constitute fraud.

Grounds for suspension of registration (I-FIRE) 1. If any time, the Information contained in the registration statement filed is or has become misleading, incorrect, inadequate or incomplete in any material respect; or 2. The sale or offering for sale of the security registered thereunder may work or tend to work a Fraud; 3. Pending Investigation of the security registered, if the Commission deems it necessary, to ascertain whether the registration of such security should be revoked on any ground specified the SRC; 4. REfusal to furnish information required by the Commission (Sec. 15, SRC).

Grounds for rejection of a registration statement and revocation of the effectivity of a registration statement and the registration of a security (I(irefco) ICE) After due notice and hearing by issuing an order to such effect, the Commission may reject the registration statement or revoke the registration of a security based on the following grounds: 1.

2.

3.

Any issuer who refuses to permit the Examination to be made by the Commission.

The Issuer: a. Has been judicially declared Insolvent b. Has violated any of the provisions of the Code, the Rules promulgated pursuant thereto, or any order of the SEC of which the issuer has notice in connection with the offering for which a registration statement has been filed c. Has been or is Engaged or is about to engage in fraudulent transactions d. Has made any False or misleading representation of material facts in any prospectus concerning the issuer or its securities; or e. Has failed to comply with any requirement that the COmmission may impose as a condition for registration of the security for which registration statement has been filed. The registration statement is on its face Incomplete or inaccurate in any material respect or includes any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The issuer, any officer, director or Controlling person of the issuer, or any person performing similar functions, or any underwriter 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 SEC or other competent judicial or administrative body for violations of securities, commodities and other related laws.

Grounds for suspension or cancellation of certificate of registration (ROSe Co BRO) 1. Fraud in procuring Registration 2. Serious misrepresentation as to Objectives of corporation 3. Refusal to comply with lawful order of SEC 4. COntinuous non-operation for at least 5 years 5. Failure to file By-laws within required period 6. Failure to file Reports 7. Other similar grounds (Sec. 6 [L], SRC). Order of suspension by the SEC requires a subsequent hearing An order of suspension must be followed by a hearing to be conducted by the Commission. If the Commission determines that the sale of any security should be revoked, it shall issue an order prohibiting the sale of such security. Until the issuance of a final order, the suspension of the right to sell, though binding upon the persons notified thereof, shall be deemed confidential, and shall not be published, unless it shall appear that the order of suspension has been violated after notice. However, if the Commission finds that the sale of the security will neither be fraudulent nor result in fraud, it shall forthwith issue an order revoking the order of suspension, and such security shall be restored to its status as a registered security as of the date of such order of suspension.

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW PROHIBITIONS ON FRAUD, MANIPULATIONS AND INSIDER TRADING

d. Hype and dump – engaging in buying activity at increasingly higher prices and then selling securities in the market at the higher prices. e. Boiler room operations – refers to activities that involve the use of high pressure sale tactics such as direct mail offers or telephone follow-ups to investors to promote purchase and sale of securities wherein there is misrepresentation in these securities. This is a fraudulent transaction that tricks investors into trading in a fake market. f. Daisy chain – refers to a series of purchase and sales of the same issue at successively higher prices by the same group of people with the purpose of manipulating prices are drawing unsuspecting investors into the market leaving them defrauded of their money and securities. g. Front-Running – is the prohibited practice of a broker-dealer executing its proprietary order before the customer’s order for the same security. This violates the fiduciary responsibility by the broker-dealer to its customer accounts as well as placing the customer’s order first. h. Churning – involves the excessive trading of securities by a broker-dealer in a customer’s discretionary account in order to generate commissions, without regard to the customer’s investment objective. 3. 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 any one or more persons conducted for the purpose of raising or depressing the price of that security for the purpose of inducing the purchase or sale of such security. 4. 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. 5. To effect, either 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 Code or by rules of the Commission.

MANIPULATION OF SECURITY PRICES Acts which are considered manipulation of security prices The price of securities should be dictated by market forces. It cannot be pegged or stabilized. The following acts are considered as manipulation of security prices and are therefore prohibited: 1. Transactions intended to create a false or misleading appearance of active trading in any listed security traded in an Exchange or any other trading market: a. Wash Sale – is a transaction in which there is no genuine change in the beneficial (or actual) ownership of a security b. Matched Sale – is a change of ownership in the securities by entering an order for the purchase or sale of a security with the knowledge that a simultaneous order 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. c. Similar transactions where there is no change of beneficial ownership. 2. Effecting a series of transactions that will raise or depress the price of securities to induce the purchase or sale of securities respectively, or creating active trading to induce transactions through manipulative devices: a. Marking the close – buying and selling of securities at the close of the market in an effort to alter the closing price of these securities. b. Painting the tape – engaging in a series of transactions effected by brokers in securities that are reported publicly to give the impression or illusion of activity or price movement in a security, which may trick investors into trading in these securities because of the alleged trading volume or indications of interest. c. Squeezing the float – refers to taking advantage of a shortage of securities in the market by controlling the demand side and exploiting market congestion during such shortages in a way to create artificial prices. This prevents the actual market from determining the price of these securities.

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SECURITIES REGULATION CODE SHORT SALES

3. 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 4. 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 5. Constructive Insider – A person who learns such information by a communication from any of the foregoing insiders (Sec. 3.8, SRC).

Short sale It is the selling of shares which the seller does not actually own or possess and therefore he cannot, himself, supply the delivery. Short selling leads to speculation of price of securities. Short swing transaction It is a transaction by the director, issuer or any person controlling the issuer (stockholder owning 10% of the stocks), whereby such person buys and sells securities within six (6) months.

Other prohibited acts in an insider trading 1. For an insider to communicate material non-public information about the issuer or the security to any person who by virtue of the communication thereby becomes an insider, where the original insider communicating the information knows or has reason to believe that such person will likely buy or sell a security of the issuer while in possession of such information 2. When a tender offer has commenced or is about to commence, it is unlawful for any person, other than the tender offeror, who is in possession of material non-public information relating to such tender offer to buy or sell the securities of the issuer that are sought or to be sought by such tender offer, if such person knows or has reason to believe that the information is non-public and has been acquired directly or indirectly from the tender offer, or those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer 3. When a tender offer has commenced or is about to commence, it is also unlawful for any tender offeror, or those acting on its behalf, the issuer of securities covered by such tender offer, and any insider, to communicate material non-public information to any person relating to the tender offer which would likely result in violation of prohibition of the insider from trading.

FRAUDULENT TRANSACTIONS Fraudulent transactions The following are considered as fraudulent transactions: 1. Employment of any device, scheme or artifice to defraud investors. 2. Obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statement made not misleading. 3. Engaging in any act, transaction, practice or course of business, which operates as a fraud or deceit upon any person. INSIDER TRADING Insider trading A purchase or sale made by an insider, or such insider’s spouse or his relative by affinity or consanguinity within the second degree, legitimate or common-law, shall be presumed to be effected while in possession of material non-public information if transacted after such information came into existence but prior to the public dissemination of such information, and lapse of reasonable time for the market to absorb such information.

Material non-public information (1995 Bar Question)

Insider

1. Information about the issuer or the security 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 2. Would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security (Sec. 27.2, SRC).

A person in possession of corporate material information not generally available to the public. Who may be an insider (1995 Bar Question) 1. The issuer 2. A director or officer (or person performing similar functions) of, or a person controlling the issuer

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MERCANTILE LAW Possible defenses against insider trading

Public company

1. That the information was acquired not on account of his relationship with the issuer; or 2. That he disclosed the information to the other party who knew or had the reason to believe he knew the material information; 3. That the purchaser or seller was not aware of the material, non-public information at the time of the purchase or the sale.

The following are considerer as public company: 1. Those listed on an exchange; or 2. Those with assets of at least PHP 50M and having 200 shareholders owning at least 100 shares each. 3. Those companies that have an effective registration statement under Section 12 of the SRC.

PROTECTION OF INVESTORS

Tender offer is required to be made in the following instances: 1. Any person or group of persons acting in concert who intends to acquire 35% or more of any class of equity shares in a public company shall disclose such intention and contemporaneously make a tender offer for the percent sought to all shareholders of such class.

Mandatory tender offer

Provisions in the SRC intended to protect the investors 1. Tender Offer Rule 2. Rules on Proxy Solicitation 3. Disclosure Rule

NOTE: In the event that the tender offer is oversubscribed, the aggregate amount of securities to be acquired at the close of such tender offer shall be proportionately distributed across both selling shareholder with whom the acquirer may have been in private negotiations and the minority shareholders.

TENDER OFFER RULE Tender offer It is the publicly declared intention by a person alone or in concert with others to buy securities of a public corporation. It is an invitation by the acquirer of shares of a company for other stockholders to tender their shares to the acquirer so that they may sell their shares in the same price and conditions as the previously acquired shares.

2. Any person or group of persons acting in concert who intends to acquire 35% or more of any class of equity shares of a public company (corporation with assets of at least P 50,000,000.00 and having 200 or more stockholders with at least 100 shares for each stock holder) pursuant to an agreement made between or among the person or group of persons and one or more sellers. 3. Any person or group of persons acting in concert intends to acquire 35% or more of equity shares of a public company in one or more transactions within a period of 12 months shall be required to make a tender offer to all holders of such class for the number of shares so acquired within the same period. 4. 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 under this Rule for all the outstanding equity securities to all remaining stockholders of the said company at a price supported by a fairness opinion provided by an independent financial advisor or equivalent third party. The acquirer in such tender offer shall be required to accept any and all securities thus tendered. 5. In any transaction covered by this Rule, the sale of shares pursuant to the private transaction shall not be completed prior to the closing and completion of the tender offer. Transactions with any of the seller/s of significant block of shares with whom the acquirers

It is given to all stockholders by: 1. Filing with the SEC a declaration to that effect, and paying the filing fee. 2. Furnishing the issuer a statement containing the information required of the issuers as SEC may prescribe, including subsequent or additional materials. 3. Publishing all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such security. Purpose of tender offer Tender offer is in place to protect the interest of minority stockholders of a target company against any scheme that dilutes the share value of their investments. It affords such minority shareholders the opportunity to withdraw or exit from the company under reasonable terms or a chance to sell their shares at the same price as those of the majority stockholders.

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SECURITIES REGULATION CODE may have been in private negotiation shall close at the same time and upon the same terms as the tender offer made to the public under this Rule. For paragraph (2)(B), the last sale meeting the threshold shall not be consummated until the closing and completion of the tender offer.

Obligations of person making a tender offer 1. Make an announcement of his intention in a newspaper of general circulation, prior to the commencement of the offer; 2. At least (2) business days prior to the date of the commencement of the tender offer: a. File with the SEC a required form for tender offer including all exhibits thereto (and any amendments thereto), with the prescribed filing fees; and b. Hand deliver a copy of such form including all exhibits (and amendments thereto) to the target company and its principal executive office and to each Exchange where such class of target company’s securities are listed for trading. 3. Report the results of the tender offer by filing with the SEC, not later than ten (10) calendar days after the termination of the tender offer, copies of the final amendments to the form (Sundiang, 2014).

Coverage of the application of tender offer The mandatory tender offer rule covers not only direct acquisition but also indirect acquisition or “any type of acquisition.” The legislative intent of Section 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 an indirect means, mandatory tender offer applies. What is decisive is the determination of the power of control. The legislative intent behind the tender offer rule makes clear that the type of activity intended to be regulated is the acquisition of control of the listed company through the purchase of shares. Control may be effected through a direct and indirect acquisition of stock, and when this takes place, irrespective of the means, a tender offer must occur (Cemco Holdings v. National Life Insurance Company, G.R. No. 171815, August 7, 2007).

Unlawful and prohibited acts relating to tender offers It shall be unlawful for any person to: 1. Make any untrue statement of a material fact or omit to state any material fact necessary in order to make statements made, in the light of the circumstances under which they are made, not misleading, or 2. Engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation.

Illustration of the application of tender offer in direct acquisition: The shares of stock of X company are owned by A (19%), B (16%), C (20%), D (14%), E (31%). If Aljon buys the shares of A (19%), the transaction is not subject to mandatory tender offer. However, if Aljon buys the shares of A (19%) and the shares of B (16%), then tender offer must be made because the total shares bought by Aljon is 35%.

Margin trading A kind of trading that allows a broker to advance for the customer/investor part of the purchase price of the security and to keep the same security as collateral for such advance.

Illustration of the application of tender offer in indirect acquisition:

Margin allowance standard The shares of stock of X company are owned by A (16%), B (19%), C (15%), D (18%), and Corporation E (32%) respectively. The shares of Corporation E are owned by Kenneth (50%), King (25%) and Jacq (25%). If Aljon acquires the shares of B (19%), the transaction is not subject to mandatory tender offer because it did not reach the 35% threshold limit required by law. However, if Aljon acquires the shares of B (19%) and the shares of Kenneth in Corporation E (50% of 32 is 16%), then, tender offer must be made because the total shares bought by Aljon directly and indirectly is 35%.

GR: The credit extended must be for an amount not greater than, whichever is higher of: 1. 65% of the current market price of the security; or 2. 100% of the lowest market price during the preceding 36 calendar months, but not more than 75% of the current market price. XPN: The Monetary Board may increase or decrease the above percentages, in order to achieve the objectives of the Government with due regard for

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW promotion of the economy and prevention of the use of excessive credit.

issuer of the security, to the Exchange where the security is traded and to the Commission. (Sec. 20, SRC)

Purposes of the margin requirements DISCLOSURE RULE They are primarily intended to achieve a macroeconomic purpose – the protection of the overall economy from excessive speculation in securities. Their recognized secondary purpose is to protect small investors.

Beginning of disclosure requirement It begins at registration and continues periodically through the regular filing of periodic report.

Burden of compliance with margin requirements

Suspension of disclosure

The brokers and dealers have the burden of compliance with margin requirements.

It may be suspended for any fiscal year after the year such registration became effective if such issuer as of the first day of any such fiscal year, has less than 100 shareholders of such class of securities and it notifies the Commission of such (Rule 17.1, SRC IRR).

Note: In securities trading, the brokers are essentially the counterparties to the stock transactions at the Exchange. Since the principals of the broker are generally undisclosed, the broker is personally liable for the contracts thus made. Brokers have a right to be reimbursed for sums advanced by them with the express or implied authorization of the principal (Abacus Securities Corporation v. Ampil, G.R. No. 160016, Feb. 27, 2006).

End of disclosure requirement GR: Disclosure does not end because once an issuer becomes a reporting company, it remains as such even when the registration of securities has been revoked (Rule 13 SCR IRR).

RULES ON PROXY SOLICITATION Requisite for valid proxy solicitation

XPN: If the primary license is revoked.

1. It must be in writing 2. It must be signed by the stockholder or his duly authorized representative 3. It must be filed before the scheduled meeting with the corporate secretary (Sec. 20, SRC).

XPN to the XPN: In the case of hospitals and educational institutions if the primary license is revoked, the disclosure requirement still continues because of public interest. Reportorial requirements

NOTE: For public companies, the period to submit proxy solicitation should not be later than five (5) days before the meeting unless the by-laws provides for a longer period.

1. Issuers: a. Shall file with the Commission within 135 days, after the end of the issuer’s fiscal year, or such other time as the Commission may prescribe, an annual report which shall include among others, a balance sheet, profit and loss statement and statement of cash flows, for such last fiscal year, certified by an independent certified public accountant, and a management discussion and analysis of results of operations; and b. Such other periodical reports for interim fiscal periods and current reports on significant developments of the issuer as the Commission may prescribe as necessary to keep current information on the operation of the business and financial condition of the issuer (Sec. 17, SRC). 2. Types of issuers required to file reports

Unless otherwise provided in the proxy, the proxy 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 one time.

Rules on proxy solicitation with regard to broker or dealer 1. No broker or dealer shall give any proxy, consent or authorization, in respect of any security carried for the account of a customer, to a person other than the customer, without the express written authorization of such customer. 2. A broker or dealer who holds or acquires the proxy for at least 10% or such percentage as the Commission may prescribe of the outstanding share of the issuer, shall submit a report identifying the beneficial owner within 10 days after such acquisition, for its own account or customer, to the UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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SECURITIES REGULATION CODE a. An issuer which has sold a class of its securities pursuant to a registration statement under Section 12 of the SRC; b. An issuer with a class of securities listed for trading in an Exchange; c. An issuer with assets of at least PHP 50M and having 200 or more holders each holding at least 100 shares 3. Persons acquiring securities - If the issuer is one that has to make a report, any person who acquires directly or indirectly the beneficial ownership of more than 5% of such class, or in excess of such lesser per centum as the Commission by rule may prescribe, shall, within 10 days after such acquisition or such reasonable time as fixed by the Commission, submit to the issuer of the security, to the Exchange where the security is traded, and to the Commission a sworn statement containing: a. His personal circumstances b. The nature of such beneficial ownership c. If the purpose was to acquire control of the business, any plans the recipient may have affecting a major change in the business d. The number of shares beneficially owned, and the number of shares for which there is a right to acquire e. granted to such person or his associates f. Information as to any agreement with a third person regarding the securities (Sec. 18, SRC). 4. Persons that has beneficial ownership of 10% or more - Every person who is directly or indirectly the beneficial owner of more than 10% of any class of any equity security, or who is director or an officer of the issuer of such security, shall file: a. Statement with the SEC and, if such security is listed for trading on an Exchange, also with the Exchange, of the amount of all equity securities of such issuer of which he is the beneficial owner, . Within 10 days after the close of each calendar month, if there is a change in ownership during such month, a statement indicating his ownership at the close of the calendar month and such changes in his ownership as have occurred during such calendar month (Sec. 23, SRC).

registration do not apply to securities of banks which are exempt under Section 5(a) (3) of the Revised Securities Act, however, banks with a class of securities listed for trading on the Philippine Stock Exchange, Inc. are covered by certain Revised Securities Act Rules governing the filing of various reports with SEC. The CA affirmed the SEC. Is Union Bank required to comply with SEC’s full disclosure rules? A: Yes, Union Bank is required to comply with SEC’s full disclosure rule. The exemption from the registration requirement enjoyed by Union Bank does not necessarily connote that it is exempted from the other reportorial requirements. Having confined the exemption enjoyed by Union Bank merely to the initial requirement of registration of securities for public offering, and not to the subsequent filing of various periodic reports, the SEC, as the regulatory agency, is able to exercise its power of supervision and control over corporations and over the securities market as a whole. Otherwise, the objectives of the `Full Material Disclosure’ policy would be defeated since Union Bank and its dealings would be totally beyond the reach of respondent Commission and the investing public (Union Bank of the Philippines v. SEC, G.R. No. 138949, June 6, 2001). CIVIL LIABILITY Grounds for civil liability to arise 1. False Registration Statement (Sec. 56, SRC) 2. Fraud with connection to prospectus, communications and reports (Sec. 57, SRC) 3. Fraud in connection with security transactions (Sec. 58, SRC) 4. Manipulation of security prices (Sec. 60, SRC) 5. Insider trading (Sec. 61, SRC) Persons that may be liable in case of false registration statement 1. The issuer and every person who signed the registration statement 2. Every person who was a director of, or any other person performing similar functions, or a partner in, the issuer at the time of the filing of the registration statement or any part, supplement or amendment thereof with respect to which his liability is asserted 3. Every person who is named in the registration statement as being or about to become a director of, or a person performing similar functions, or a partner in, the issuer and whose written consent thereto is filed with the registration statement

Q: Union Bank, through its General Counsel and Corporate Secretary, sought the opinion of the SEC as to the applicability and coverage of the Full Material Disclosure Rule on banks, contending that said rules, in effect, amend Section 5 (a) (3) of the Revised Securities Act which exempts securities issued or guaranteed by banking institutions from the registration requirement. The SEC, in reply, informed Union Bank that while the requirements of

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MERCANTILE LAW 4. Every auditor or auditing firm named as having certified any financial statements used in connection with the registration statement or prospectus 5. Every person who, with his written consent, which shall be filed with the registration statement, has been named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement, report, or valuation, which purports to have been prepared or certified by him 6. Every selling shareholder who contributed to and certified as to the accuracy of a portion of the registration statement, with respect to that portion of the registration statement which purports to have been contributed by him 7. Every underwriter with respect to such security

Jurisdiction over civil liabilities The court which has jurisdiction over cases involving civil liabilities is the Regional Trial Court. Limitation for awarding damages 1. The court can award not exceeding triple the amount of the transaction plus actual damage 2. The court is also authorized to award attorney’s fees not exceeding 30% of the award Award exemplary damages The court may award exemplary damages in cases of: 1. Bad Faith 2. Fraud 3. Malevolence or 4. Wantonness in the violation of SRC or the Rules and Regulations promulgated by the Commission

Persons liable with regard to fraud with connection to prospectus, communications and reports Any person who offers to sells or sells 1. In violation any provisions on registration of securities; and 2. By the use of any means or instruments of transportation or communication, by means of a prospectus or other written or oral communication.

INDEPENDENT DIRECTORS Requirement of independent director The Securities Regulations Code requires an independent director when any corporation with a class of equity securities listed for trading on an exchange or with assets in excess of Fifty Million Pesos and having two hundred or more holders, at least 200 of which are holding at least one hundred shares of a class of its equity securities or which has sold a class of equity securities to the public pursuant to sec. 12 must have at least two independent directors or such directors must constitute at least twenty percent of the board, whichever is less.

Persons liable with regard to fraud in connection with security transactions Any person who engages in any act or transaction in violation of Sections 19.2, 20 or 26 of SRC. Persons liable for the manipulation of security prices Any person who willfully participates in any act or transaction in violation of Section 24 shall be liable to any person who shall purchase or sell any security at a price which was affected by such act or transaction.

Q: Section 38 of The Securities Regulation Code defines an independent director as a person who must not have a relation with the corporation which would interfere with his exercise of independent judgment in carrying out the responsibilities of a director. To ensure independence therefore, he must be – (2012 Bar Question) a. Nominated and elected by the entire shareholders; b. Nominated and elected by the minority shareholders; c. Nominated and elected by the majority shareholders; d. Appointed by the Board

Persons liable with regard to insider trading Any person in case of legal tender who: 1. Purchases or sells a security while in possession of material information not generally available to the public. 2. Communicates material non-public information. NOTE: The liability of the persons enumerated shall be jointly and severally.

Prescriptive period for filing of action

A: B. He must be nominated and elected by the minority shareholders

Two years after the discovery of the facts constituting the cause of action and within five years after such cause of action accrued UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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SECURITIES REGULATION CODE RESPONSIBILITY AND PRIMARY OBJECTIVE

THE NEW CENTRAL BANK ACT (NCBA) R.A. 7653

Responsibilities of Bangko Sentral ng Pilipinas (PSR) 1. To provide policy directions in the areas of money, banking, and credit 2. To supervise bank operations 3. To regulate the operations of finance companies and non-bank financial institutions performing quasi-banking functions, and similar institutions (Sec. 3, NCBA).

Bangko Sentral ng Pilipinas (BSP) It is the state’s central monetary authority. It is the government agency charged with the responsibility of administering the monetary, banking and credit system of the country and is granted the power of supervision and examination over bank and non-bank financial institutions performing quasi-banking functions, including savings and loan associations (Busuego vs. CA, G.R. No. L-48955, June 30, 1987).

Primary objectives of Bangko Sentral ng Pilipinas 1. To maintain price stability conducive to a balanced and sustainable growth of the economy; and 2. To promote and maintain monetary stability and the convertibility of the peso (Sec. 3, NCBA).

Bangko Sentral ng Pilipinas as an institution The BSP is a government-owned corporation which enjoys fiscal and administrative autonomy.

Functions of Bangko Sentral ng Pilipinas (BRAGS-CHB)

STATE POLICIES

1.

Policy of the state with respect to the creation of the Bangko Sentral ng Pilipinas The State shall maintain a central monetary authority that shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit (Sec 2, New Central Bank Act [NCBA]). While it is a government owned corporation it enjoys fiscal and administrative autonomy.

2. 3.

4. 5. 6. 7.

CREATION OF THE BANGKO SENTRAL NG PILIPINAS (BSP) Salient considerations on the creation of Bangko Sentral ng Pilipinas

8. 1. 2. 3.

It is established as an independent central monetary authority. Its capital shall be P50,000,000,000, to be fully subscribed by the Philippine Government. The P10,000,000,000 of the capital shall be fully paid for by the Government upon the effectivity of NCBA and the balance to be paid for within a period of 2 years from the effectivity of NCBA in such manner and form as the Government, through the Secretary of Finance and the Secretary of Budget and Management, may thereafter determine (ibid).

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Banker of the government – the BSP shall be the official depository of the Government and shall represent it in all monetary fund dealings (Secs. 110- 116, NCBA). Custodian of Reserves (Secs. 64-66, 94, 103, NCBA) Financial Advisor of the government (Secs. 123-124) – Under Article VII, Sec. 20 of the 1987 Constitution, the President may contract or guarantee foreign loans but with the prior concurrence of the Monetary Board. Government agent (Secs. 117-122, NCBA) Source of credit (Secs. 61-63, 81-89, 109, NCBA) Issuer of Currency (Sec. 49-60, NCBA) Clearing channel or House; especially where the PCHC does not operate (Sec. 102, NCBA) Supervisor of the Banking system (Sec. 25, NCBA) – shall include the power to: a. Examine, which power extends to enterprises wholly or majority-owned or controlled by the bank (Sec. 7, General Banking Law [GBL]); this power may not be restrained by a writ of injunction unless there is convincing proof that the action of the BSP is plainly arbitrary (Sec. 25, NCBA) b. Place a bank under receivership or liquidation (Sec. 30, NCBA) c. Initiate criminal prosecution of erring officers of banks

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW misfeasance or failure to exercise extraordinary diligence (Sec 16 NCBA).

POWERS AND FUNCTIONS OF THE MONETARY BOARD

HOW BSP HANDLES BANKS IN DISTRESS

Monetary Board It is the body through which the powers and functions of the BSP are exercised (Sec 6, NCBA).

In case of a distressed bank, the BSP appoints a conservator or receiver or closure of the bank.

Powers and functions of the Monetary Board (RASBI)

CONSERVATORSHIP Conservator

1. Issue Rules and regulations it considers necessary for the effective discharge of the responsibilities and exercise of its powers. 2. Direct the management, operations, and Administration of the BSP, reorganize its personnel, and issue such rules and regulations as it may deem necessary or convenient for this purpose. 3. Establish a human resource management System. 4. Adopt an annual Budget for and authorize such expenditures by the BSP as are in the interest of the effective administration and operations of the BSP in accordance with applicable laws and regulations. 5. Indemnify its members and other officials of the BSP, including personnel of the departments performing supervision and examination functions against all costs and expenses reasonably incurred by such persons in connection with any civil or criminal action (Sec 15, NCBA).

One appointed if the bank is in the state of illiquidity or the bank fails or refuses to maintain a state of liquidity adequate to protect its depositors and creditors. The bank still has more assets than its liabilities but its assets are not liquid or not in cash thus it cannot pay its obligation when it falls due. The bank, not the BSP, pays for fees. Powers of a conservator (CARe BEAr) 1. Collect all monies and debts due to the said bank 2. To take charge of the Assets, liabilities, and the management thereof 3. REorganize, the management thereof 4. And such other powers as the monetary Board deems necessary 5. Exercise all powers necessary to restore its viability, with the power to overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank 6. To bring court actions to Assail or Repudiate contracts entered into by the bank. (First Philippine International Bank vs. CA, G.R. No. 115849, Jan. 24, 1996).

NOTE: In the event of a settlement or compromise, indemnification shall be provided only in connection with such matters covered by the settlement as to which the BSP is advised by external counsel that the person to be indemnified did not commit any negligence or misconduct. The costs and expenses incurred in defending the aforementioned action, suit or proceeding may be paid by the BSP in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the member, officer, or employee to repay the amount advanced should it ultimately be determined by the Monetary Board that he is not entitled to be indemnified as provided in this subsection (ibid.).

Power of a conservator does not extend to the revocation of valid and perfected contracts The powers of a conservator cannot extend to post facto repudiation of valid and perfected transactions. Thus, the law merely gives the conservator power to revoke contracts that are deemed to be defectivevoid, voidable, unenforceable or rescissible. Hence, the conservator merely takes the place of the bank’s board.

Liabilities of the members of the Monetary board Members of the Monetary Board, officials, examiners, and employees of the BSP who: 1. Willfully violate RA 7653 2. Who are guilty of negligence, abuses or acts of malfeasance or misfeasance or 3. Fail to exercise extraordinary diligence in the performance of his duties

Termination of conservatorship Conservatorship is terminated when the Monetary Board is satisfied that the bank can operate on its own.

Shall be held liable for any loss or injury suffered by the BSP or other banking institutions as a result of such violation, negligence, abuse, malfeasance, UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

NOTE: When 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

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BANKING LAWS involve probable losses to its depositors or creditors, the bank will go under liquidation.

Nature of order of receivership While resolutions of the Monetary Board forbidding a bank to do business on account of a condition of insolvency and appointing a receiver to take charge of the bank’s assets or determining whether the bank may be rehabilitated or should be liquidated are by law “final and executory.” However, they can be set aside by the court on one specific ground - if the action is plainly arbitrary and made in bad faith. Such contention can be asserted as an affirmative defense or a counterclaim in the proceeding for assistance in liquidation (Salud v. Central Bank, G.R. No. L-17630, Aug. 19, 1986).

RECEIVERSHIP Receiver One appointed if the bank is already insolvent which means that its liabilities are greater than its assets. The Court has no authority to appoint a receiver for a bank if the latter will function as such under BSP law. The power to appoint belongs to BSP. NOTE: For banks, the receiver would be the Philippine Deposit Insurance Corporation; for quasi-banks, it could be any person of recognized competence in banking or finance (Sec. 30, NCBA).

CLOSURE

Duties of a receiver

Grounds for closure of a bank or a quasi bank

1. The receiver shall immediately gather and take charge of all the assets and liabilities of the institution. 2. Administer the same for the benefit of the creditors, and exercise the general powers of a receiver under the Revised Rules of Court 3. 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. 4. Within 90 days from the take-over, the receiver shall determine whether the institution may be rehabilitated or otherwise placed in such a condition that it may be permitted to resume business with safety to its depositors and creditors and the general public 5. If the receiver determines that the institution cannot be rehabilitated or permitted to resume business, then the Monetary Board shall notify in writing the board of directors of the institution of its findings and direct the receiver to proceed with liquidation of the institution (Sec 30, NCBA).

1. Cash Flow test - Inability to pay liabilities as they become due in the ordinary course of business (Sec. 30 [a] NCBA). 2. Balance sheet test – Insufficiency of realizable assets to meet its liabilities (Sec 30 [b] NCBA). 3. Inability to continue business without involving probable losses to its depositors and creditors (Sec 30 [c] NCBA). 4. Willful violation of 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 (Sec 30 [d] NCBA). 5. Notification to the BSP or public announcement of a bank holiday (Sec 53, GBL). 6. Suspension of payment of its deposit liabilities continuously for more than 30 days (Sec 53, GBL). 7. Persisting in conducting its business in an unsafe or unsound manner (Sec 56, GBL). Close now-hear later doctrine It is to prevent unwarranted dissipation of the bank’s assets and as a valid exercise of police power to protect the depositors, creditors, stockholders and the general public. The law does not contemplate prior notice and hearing before the bank may be directed to stop operations and placed under receivership (Central Bank of the Philippines v. CA, G.R. No. 76118 Mar. 30, 1993).

The receiver is not authorized to transact business in connection with the bank’s assets and property A receiver can only perform acts of administration and not acts of dominion. The receiver cannot approve an option to purchase real property. He has only the authority to administer the same for the benefit of its creditors (Abacus Real Estate Development Center, Inc. v. Manila Banking Corp, G.R. No. 162270, Apr. 6, 2005).

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 hearings would not only be impractical but would tend to defeat the very purpose of the law (Rural Bank of Lucena v. Arca, G.R. No. L-21146, September 20, 1965).

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MERCANTILE LAW BSP may order the closure of the bank even without prior hearing. BSP may rely on the report of either the conservator, receiver or the head of the supervising and examining department. It is not required to conduct a thorough audit of the bank before ordering its closure. The "close now, hear” later doctrine justifies BSP in ordering bank closures even without prior hearing. Thus, injunction does not lie against BSP in the exercise of the power and function. A contrary rule may lead to dissipation of assets and trigger bank run. Judicial review comes only after action of the Monetary Board if the same was attended with bad faith and grave abuse of discretion (Bangko Sentral ng Pilipinas v. Valenzuela, G.R. No. 184778, October 2, 2009).

LIQUIDATION Liquidation of a bank Acts of liquidation are those which constitute the conversion of the assets of the banking institution to money or the sale, assignment or disposition of the s to creditors and other parties for the purpose of paying debts of such institution (Banco Filipino v. Central Bank, G.R. No. 70054, Dec. 11, 1991). Liquidator of a distressed bank can prosecute and defend suits against the bank Prosecution of suits, collection and the foreclosure of mortgages against debtors of the bank by the liquidator are among the usual and ordinary transactions pertaining to the administration of a bank (Banco Filipino v. Central Bank, G.R. No. 70054, Dec. 11, 1991).

The closure and liquidation of a bank, which is considered an exercise of police power may be the subject of judicial inquiry The validity of such exercise of police power is subject to judicial inquiry and could be set aside if it is either capricious, discriminatory, whimsical, arbitrary, unjust or a denial or due process and equal protection clauses of the Constitution (Central Bank v. CA, G.R. No. L-50031-32, July 27, 1981).

A liquidator may foreclose mortgages due to a bank while the issue of receivership is pending A liquidator can foreclose mortgages for and in behalf of the bank even if the issue on receivership and liquidation is still pending (Supra).

The order of closure (receivership or conservatorship) may be assailed: a) by the stockholders representing at least majority of the outstanding capital stock; b) within ten days from receipt by the board of directors of the order; c) thru a petition for certiorari on the ground that the action taken by the BSP was in excess of jurisdiction or with grave abuse of discretion as to amount to lack of jurisdiction.

Q: An intra-corporate case was filed before RTC. On the other hand, another complaint was filed before BSP to compel a bank to disclose its stockholdings invoking the supervisory power of the latter. Is there a forum shopping? A: None. The two proceedings are of different nature praying for different relief. The complaint filed with the BSP was an invocation of its supervisory powers over banking operations which does not amount to a judicial proceeding (Suan v. Monetary Board, A.C. No. 6377, Mar. 12, 2007).

Q: Upon maturity of the time deposit, the bank failed to remit. By reason of punitive action taken by Central Bank, the bank has been prevented from performing banking operations. Is the bank still obligated to pay the time deposits despite the fact that its operations were suspended by the Central Bank?

Commencement of liquidation proceedings bar the filing of a separate action or petition to assail the order of closure

A: Yes, the suspension of operations of a bank cannot excuse non-compliance with the obligation to remit the time deposits of depositors which matured before the bank’s closure (Overseas Bank of Manila v. CA, G.R. No. 45886, Apr. 19, 1989).

Once liquidation proceedings have been initiated, the majority stockholders of the bank can no longer file a separate action or petition to assail the order of closure. Instead, issues on validity of closure should be raised as affirmative defenses in the liquidation proceeding. This is necessary to prevent multiplicity of suits or conflicting resolutions ( Salud vs. Central Bank of the Philippines, G.R. No. L-17620 August 19, 1986).

Bank not liable to pay interest when closed As a general rule, the bank is not liable to pay interest on DEPOSIT once it is closed and ceased operations.

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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BANKING LAWS Liquidation proceedings may be carried out with or without tax clearance

bank is insolvent (Miranda vs. PDIC, G.R. No. 169334 September 8, 2006).

Unlike in a voluntary dissolution of a corporation under the Corporation Code, BSP can liquidate the bank with or without tax clearance. This is based on the General Banking Law.

Rule of promissory estoppel The BSP may not thereafter renege on its representation and liquidate the bank after majority stockholders of the bank complied with the conditions and parted with value to the profit of CB, which thus acquired additional security for its own advances, to the detriment of the bank’s stockholders, depositors and other creditors (Ramos v. Central Bank of the Philippines, G.R. No. L-29352, Oct. 4, 1971).

Filing of the claims against the insolvent bank GR: All claims against the insolvent bank should be filed in the liquidation proceeding. It is not necessary that a claim be initially disputed in a court or agency before it is filed with the liquidation court (Ong v. CA, G.R. No. 112830, Feb. 1, 1996).

A final and executory judgment against an insolvent bank may be stayed

XPN: Where it is the bank that files a claim against another person or legal entity, the claim should be filed in the regular courts.

After the Monetary Board has declared that a bank is insolvent and has ordered it to cease operations, the assets of the insolvent bank are held in trust for the equal benefit of all creditors. One cannot obtain an advantage or preference over another by attachment, execution or otherwise. The final judgment against the bank should be stayed as to execute the judgment would unduly deplete the assets of the banks to the obvious prejudice of other depositors and creditors (Lipana v. Development Bank of Rizal, G.R. No. L-73884, Sept. 24, 1987).

Reason: The judicial liquidation is intended to provide an orderly mode for payment of all claims. In addition such petition is not in the nature of a disputed claim against the bank. Bank deposits as a rule not preferred credits The exception is when the deposits are covered by a cashier's check purchased from the bank when the bank officers knew or ought to have known that the Conservatorship v. Receivership v. Liquidation CONSERVATORSHIP

RECEIVERSHIP

LIQUIDATION

Grounds

1.Continuing inability 2.Unwilling-ness to maintain condition of liquidity

1. Inability to pay liabilities as they fall due e.g: bank run, rumors, etc. 2. Assets are less than its liabilities 3. Cannot continue business without causing damage; 4. Violation of a cease and desist order 5. “Bank holiday” for more than 30 days (Sec. 30).

1. 2.

Effects

1.Juridical personality is retained. 2.Perfected transactions cannot be repudiated

1. Juridical personality is retained 2. Suspension of operation /stoppage of business 3. Assets deemed in custodia legis (Domingo v. NLRC, G.R. 156761, Oct 17, 2006).

Same with conservator-ship

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Insolvency Bank cannot be rehabilitated

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MERCANTILE LAW HOW BSP HANDLES EXCHANGE CRISIS Legal Tender 2. All notes and coins issued by the BSP are fully guaranteed by the Republic and shall be legal tender in the Philippines for all debts, both public and private (Sec. 52). Legal tender power of coins 1. 1-Peso, 5-Peso and 10-Peso coins: In amounts not exceeding P1,000.00 2. 25 centavo coin or less: In amounts not exceeding P100.00 (Circular No. 537, 2006).

Instances where the Banko Sentral may exercise its exchange regulating powers

NOTE: Notes, regardless of denomination, are legal tender for any amount.

1.

Rules on the authority of the Bangko Sentral ng Pilipinas to replace legal tender

2.

1. Notes and coins called in for replacement shall remain legal tender for a period of one year from the date of call. 2. After that period, they shall cease to be legal tender during the following year or for such longer period as MB may determine. 3. After the expiration of this latter period, the notes and coins which have not been exchanged shall cease to be a liability of BSP and shall be demonetized (Sec. 57, NCBA).

3.

NOTE: Checks representing demand deposits do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor. However, a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account (Sec. 60, NCBA).

2.

1.

1. Notes for any series or denomination – More than 5 years old 2. Coins – More than 10 years old NOTE: Coins which show signs of filing, clipping or perforation and notes which have lost more than 2/5s of their surface or all of the signatures inscribed therein shall be withdrawn from the circulation and demonitized without compensation to the bearer.

Take such remedial measures as are appropriate and within the powers granted to the Monetary Board, and the BSP. Submit to the President of the Philippines and the Congress, and make public a detailed report which shall include, as a minimum, a description and analysis of: a. The nature and causes of the existing or imminent decline; b. The remedial measures already taken or to be taken by the Monetary Board c. The monetary, fiscal or administrative measures further proposed d. The character and extent of the cooperation required from other government agencies for the successful execution of the policies of the Monetary Board (Sec. 67, NCBA).

Emergency restrictions on the foreign exchange operations 1. Temporarily suspending and restricting sales of foreign exchange by the BSP; 2. Subjecting all transactions in gold and foreign exchange to license by the BSP;

Exercise of the power to determine rates of exchange The Monetary Board shall determine the rates at which the BSP shall buy and sell spot exchange, UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

The international reserve of the BSP falls to a level which the Monetary Board considers inadequate to meet the prospective demands Whenever the international reserve appears to be in imminent danger of falling to such a level Whenever the international reserve is falling as a result of payments or remittances abroad which, in the opinion of the Monetary Board are contrary to the national welfare (Sec 67, NCBA).

Actions taken by the Bangko Sentral when international stability of Peso is threatened

Period of replacement

1.

and shall establish deviation limits from the effective exchange rate or rates as it may deem proper. The Monetary Board shall similarly determine the rates for other types of foreign exchange transactions by the BSP, including purchases and sales of foreign notes and coins, but the margins between the effective exchange rates and the rates thus established may not exceed the corresponding margins for spot exchange transactions by more than the additional costs or expenses involved in each type of transactions (Sec. 74, NCBA).

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BANKING LAWS 3. Requiring that any foreign exchange thereafter obtained by any person residing or entity operating in the Philippines be delivered to the BSP or to any bank or agent designated by the BSP for said purpose, at the effective exchange rate or rates (Sec. 72, NCBA).

2.

by any person, government official or office (Sec. 2, RA 1405). Disclosure by any official or employee of any banking institution to any unauthorized person of any information concerning said deposit (Sec. 3, RA 1405).

NOTE: To ensure sufficiency of foreign exchange

ACTS NOT COVERED BY THE PROHIBITION

resources, convertibility of the peso, and promotion of domestic investment of bank resource, the Monetary Board may require the banks to sell to the BSP or to other banks all or part of their surplus holdings of foreign exchange. (Sec. 76, NCBA)

Non-bank official or employee is not covered by the prohibition. Neither is disclosure by a bank official or employee of information about bank deposit in favor of a co-employee in the course of the performance of his duties is not covered by the prohibition.

Q: X maintains a savings deposit in the amount of Php·1 Million with ABC Bank Corporation. X also has obtained a loan from ABC Bank Corporation in the amount of Php1 Million. In case of default - (2012 Bar Question)

DEPOSITS COVERED Deposits covered by RA 1405

a.

ABC Bank can set-off the loan from the savings account being maintained by X with ABC Bank. b. Set-off is not possible because legal compensation is not allowed in banking transaction. c. Deposit accounts are usually earmarked for specific purpose hence offsetting is not legally possible. d. Off -setting is not possible because the obligation of X is a "simple loan".

1. All deposits of whatever nature with banks or banking institutions found in the Philippines; or 2. Investments in bonds issued by the Philippine government, its branches, and institutions.(Sec. 2, R.A. 1405) 3. Trust accounts are included in the scope of the law. Meaning of the phrase "of whatever nature and kind" RA 1405 is no longer limited to deposits governed by the law on loans giving rise to creditor-debtor relationship but it covers fund of whatever nature so long as the bank may use and utilize it in authorized loans.

A: A. The relationship between a bank and its depositor is that of creditor and debtor. For this reason, a bank has the right to set-off the deposits in its hands for the payment of a depositor’s indebtedness (Equitable PCI Bank vs. Ng Sheung Ngor, et al., 171545, Dec. 19, 2007).

Trust funds covered by the term “deposit” The money deposited under the trust agreement (“Trust account”) is intended not merely to remain with the bank but to be invested by it elsewhere. To hold that this type of account is not protected by R.A. 1405 would encourage private hoarding of funds that could otherwise be invested by banks in other ventures, contrary to the policy behind the law (Ejercito vs. Sandiganbayan, 509 SCRA 590,G.R. No. 157294-95, Nov. 30, 2006).

LAW ON SECRECY OF BANK DEPOSITS (R.A. 1405) PURPOSE The purposes of RA 1405 are: 1. Encourage deposit in banking institutions; and 2. Discourage private hoarding so that banks may lend such funds and assist in the economic development of the country.

NOTE: Despite such pronouncement that trust funds are considered deposits, trust funds remain not covered by PDIC.

PROHIBITED ACTS

Confidentiality granted by RA 1405 does NOT extend to Letters of Credit and Trust Receipts

The following are the prohibited acts in RA 1405: 1. Examination/inquiry/looking into all deposits of whatever nature with banks or banking institutions in the Philippines (including investment in bonds issued by the government)

The confidentiality granted by the law does NOT extend to other documents and records like L/C’s, TR’s, bank drafts and promissory notes (Opinion of

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MERCANTILE LAW the Secretary of Justice No. 5, Series of 1982; Opinion of the Secretary of Justice No. 126, Series of 1989).

Practices Act (PNB v. Gancayco, L-18343, Sept. 30, 1965) b. In cases filed by the Ombudsman and upon the latter’s authority to examine and have access to bank accounts and records (Marquez v. Desierto, GR 138569, Sept. 11, 2003) 14. Without court order: If the AMLC determines that a particular deposit or investment with any banking institution is related to the following (HK-MADS): a. Hijacking, b. Kidnapping, c. Murder, d. Destructive Arson, and e. Violation of the Dangerous Drugs Act. f. Acts of Terrorism or in violation of Human Security Act. 15. In case the law is repealed, superseded or modified by any law to the contrary.

EXCEPTIONS Instances where examination or disclosure of information about deposits can be allowed 1. Upon written consent of the depositor (Sec. 2, RA 1405) 2. In cases of impeachment (ibid) 3. Upon order of competent court in cases of bribery or dereliction of duty of public officials (ibid) 4. In cases where the money deposited or invested is the subject matter of the litigation (ibid) 5. Upon order of the Commissioner of Internal Revenue in respect of the bank deposits of a decedent for the purpose of determining such decedent’s gross estate (Sec. 6[F][1], NIRC) 6. Upon the order of the Commissioner of Internal Revenue in respect of bank deposits of a taxpayer who has filed an application for compromise of his tax liability by reason of financial incapacity to pay his tax liability (ibid) 7. The Commissioner of Internal Revenue is authorized to inquire into bank deposits of a specific taxpayer upon request for tax information from a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a party (ibid) 8. In case of dormant accounts/deposits for at least 10 years under the Unclaimed Balances Act (Sec. 2, Act No. 3936) 9. The prohibition against examination of bank deposit does not preclude its garnishment to satisfy a judgment against the depositor (Oñate vs. Abrogar, 230 SCRA 181) 10. Presidential Commission on Good Government may require the production of bank records material to its investigation (Opinion of the Secretary of Justice, Feb. 27, 1987) 11. The Anti-Money Laundering Council (AMLC) may inquire into any deposit with any bank in case of violation of the RA 9160 or the AMLA if there is probable cause that it is related to an unlawful activity (Sec. 11, RA 9160, as amended by RA 9194, 10167, and 10365) 12. The PDIC and the BSP may examine deposit accounts and all information related to them in case of a finding of unsafe or unsound banking practices (Sec. 8, RA 3591, as amended) 13. With court order: a. In cases of unexplained wealth under Sec. 8 of the Anti-Graft and Corrupt

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Q: The Bank Secrecy Law (RA 1405) prohibits disclosing any information about deposit records of an individual without court order except - (2012 Bar Question) a. in an examination to determine gross estate of a decedent. b. in an investigation for violation of Anti-Graft and Corrupt Practices. c. in an investigation by the Ombudsman. d. in an impeachment proceeding A: C. In order that the Ombudsman may inspect a bank deposit: 1. 2. 3. 4. 5.

there must be a case pending in court, the account must be clearly identified, the inspection must be limited to the subject matter of the pending case, the inspection may cover only the account identified, and the bank personnel and the account holder must be notified to be present during the inspection (Marquez vs. Desierto, 359 SCRA 772; Office of the Ombudsman vs. Ibay, 364 SCRA 281).

Foreign currency deposits Foreign currency deposits are covered by R.A. 6426 otherwise known as the “Foreign Currency Act”. Secrecy of foreign currency deposits GR: Foreign currency deposits cannot be inquired or look into. All foreign currency deposits are absolutely confidential (Sec. 8, RA 6426).

286

BANKING LAWS XPNs: 1. 2.

3.

4.

5.

6.

7.

8.

The depositor has given his written permission (ibid.) Where the funds deposited in a joint foreign currency savings account belonged exclusively to one of the depositors and were held in trust for him by the other depositor and the other depositor unilaterally closed the joint account and transferred the funds to her personal account, the latter cannot invoke the exemption from court processes under RA 6426 because she is not the owner of the deposit in the account. Consequently, the depositor who owned the funds can have her enjoined from making withdrawals from her personal account (Van Twest vs. CA, 230 SCRA 42 [1994]). A father who sued his daughter for illegally withdrawing funds from his foreign currency deposit and transferring to another bank in the name of her sister, can inquire into the deposit of the sister, because the money deposited belongs to him (China Banking Corp. vs. CA, 511 SCRA 110). The exemption from court process of foreign currency deposits under RA 6426 cannot be invoked by a foreign transient who raped a minor, escaped and was held liable for damages to the victim. The garnishment of his foreign currency deposit should be allowed to prevent an injustice and for equitable grounds. The law was enacted to encourage foreign currency deposit and not to benefit a wrongdoer (Salvacion vs. Central Bank of the Philippines, 278 SCRA 27 [1997]). The Commissioner of Internal Revenue is authorized to inquire into bank deposits of the following: a. A decedent to determine his estate; and b. Any taxpayer who has filed for an application for compromise of his tax liability c. A specific taxpayer upon request for tax information from a foreign tax authority pursuant to an international convention or agreement on tax matters to which the Philippines is a party. (Sec. 6 [f], NIRC.) AMLC may inquire into any deposit with a bank or financial institution in case of violation of RA 9160 if there is probable cause that it is related to an unlawful activity (Sec. 11, RA 9160). Upon ex parte application by a law enforcer authorized by the Anti-Terrorism Council, the justices of the CA designated as special court to handle anti-terrorism cases may authorize the examination of deposits in a financial institution upon finding probable cause of the commission

9.

of terrorism or conspiracy to commit terrorism (Sec. 27, 28, RA 9372). PDIC and BSP may examine deposit accounts and all information related to them in case of a finding of unsafe or unsound banking practices (Sec. 8, RA 3591, as amended). AMLC can investigate (a) any property of funds related to financing terrorism; (b) property or funds of any person if there is probable cause to believe he is committing or attempting or conspiring to commit terrorism or financing terrorism (Sec. 10, RA 10168).

Q: A, an individual, secured a loan from XYZ Company. C, a surety company, issued a bond to further secure the obligation. A has dollar deposits with ABC Bank. Can C inquire to ABC Bank about the foreign currency deposits of A to determine whether or not the loan proceeds were used for the purpose specified in their surety agreement? A: No. The surety which issued the bond cannot inquire into the foreign currency deposits. It cannot be examined without the consent of the depositor except in certain situations like violation of anti-money laundering law (GSIS v. CA, G.R. No. 189206, June 8, 2011). Q: X, a private individual, maintains a dollar deposit with ABC Bank. X is suspected to be the leader of a Kidnap for Ransom Gang and he is suspected of depositing all ransom money in said deposit account which are all in US Dollars. The police want to open said account to know if there are really deposits in big amounts. Which statement is most accurate? (2012 Bar Question) a. The same rules under Secrecy of Bank Deposit Act will apply. b. An approval from the Monetary Board is necessary to open the account. c. Because the deposit is in US Dollars, it is covered by the Foreign Currency Deposit Act which allows disclosure only upon the written permission of the depositor. d. Approval from the Court is necessary to order disclosure of the account.(2012 Bar) A: C. The deposit being in US Dollars, is covered by the Foreign Currency Deposit Act which allows disclosure only upon the written permission of the depositor. A bank can be compelled to disclose the records of the accounts of a depositor under the investigation for unexplained wealth

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MERCANTILE LAW Since cases of unexplained wealth are similar to cases of bribery and dereliction of duty, no reason is seen why it cannot be excepted from the rule making bank deposits confidential. In this connection, inquiry into illegally acquired property in anti-graft cases extends to cases where such property is concealed by being held or recorded in the name of other persons. This is also because the Anti-Graft and Corrupt Practices Act, bank deposits shall be taken into consideration in determining whether or not a public officer has acquired property manifestly out of proportion with his lawful income (PNB v. Gancayco, G.R. No. L-18343, Sept. 30, 1965).

interpretation or application of laws, it is presumed that the lawmaking body intended right and justice to prevail (Salvacion vs. Central Bank of the Philippines, G.R. 94723, August 21, 1997). The foreign currency deposit of a transient foreigner who illegally detained and raped a minor Filipina can be garnished to satisfy the award for damages to the victim The exemption from garnishment of foreign currency deposits under R.A. 6426 cannot be invoked to escape liability for the damages to the victim. The garnishment of the transient foreigner’s foreign currency deposit should be allowed to prevent injustice and for equitable grounds. The law was enacted to encourage foreign currency deposit and not to benefit a wrongdoer (Salvacion vs. Central Bank of the Philippines, G.R. 94723, August 21, 1997).

In an action filed by the bank to recover the money transmitted by mistake, the bank is allowed to present the accounts which it believed were responsible for the acquisition of the money R.A. 1405 allows the disclosure of bank deposits in cases where the money deposited is the subject matter of litigation. In an action filed by the bank to recover the money transmitted by mistake, necessarily, an inquiry into the whereabouts of the amount extends to whatever is concealed by being held or recorded in the name of the persons other than the one responsible for the illegal acquisition.

Penalties for violation of R.A. 1405 1. 2. 3.

Imprisonment of not more than five (5) years Fine of not more than P20,000.00 Both, in the discretion of the court (Sec. 5, RA 1405).

GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN DEPOSITS

GENERAL BANKING LAW OF 2000 (R.A. 8791)

Garnishment of a bank deposit does not violate the law

Policy of the state behind the General Banking Act (RA 8791)

The prohibition against examination or inquiry does not preclude its being garnished for satisfaction of judgment. The disclosure is purely incidental to the execution process and it was not the intention of the legislature to place bank deposits beyond the reach of judgment creditor (PCIB v. CA, G.R. No. 84526, Jan. 28, 1991).

The State recognizes the vital role of banks in 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 (Sec 2, RA 8791).

Garnishment of foreign currency deposits GR: Foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever (Sec 8. R.A. 6426).

DEFINITION AND CLASSIFICATION OF BANKS Bank A bank is an entity engaged in the lending of funds obtained from the public in the form of deposits.

XPN:The application of Section 8 of R.A. 6426 depends on the extent of its justice. The garnishment of a foreign currency deposit should be allowed to prevent injustice and for equitable grounds, otherwise, it would negate Article 10 of the New Civil Code which provides that “in case of doubt in the UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Elements for an entity to be considered doing business as a bank 1. The entity is engaged in the lending of funds

288

BANKING LAWS 2. Funds obtained from the public with at least 20 depositors 3. Funds are in the form of deposits

3. Thrift banks – These are a) Savings and mortgage banks; b) Stock savings and loan associations; and c) Private development banks, which are primarily governed by the Thrift Banks Act (R.A. 7906). 4. Rural banks – these are mandated to make needed credit available and readily accessible in the rural areas on reasonable terms and which are primarily governed by the Rural Banks Act of 1992 (RA 7353). 5. Cooperative banks –banks whose majority shares are owned and controlled by cooperatives primarily to provide financial and credit services to cooperatives. It shall include cooperative rural banks. They are governed primarily by the Cooperative Code (RA 6938). 6. Islamic banks – Banks whose business dealings and activities are subject to the basic principles and rulings of Islamic Shari’ a, such as the Al Amanah Islamic Investment Bank of the Philippines which was created by RA 6848. 7. Other classification of banks as determined by the Monetary Board of the Bangko Sentral ng Pilipinas.

NOTE: A transaction involving not a loan but purchase of receivables at a discount within the purview of investing, reinvesting, or trading in securities which an investment company may perform is not banking.

Extent of ownership of foreign individuals and non-bank corporations in a bank Foreign individuals may own or control up to forty percent (40%) of the voting stock of a domestic bank (Sec 2, GBL). Extent of ownership of a non-banking corporations in a bank GR: A corporation may only own 40% of the bank XPNs: 1. A universal bank can own up to 100% of a thrift bank 2. A corporation whose shares are listed in the stock exchange can own up to 60% of the bank. This privilege can be exercised only once. 3. If the corporation is in existence for 10 years it can own up to 60% of the bank. This privilege can only exercised once. 4. Under Foreign Bank Liberalization Law (RA 7721), the Monetary Board may authorize foreign banks to operate in the Philippines. Ownership of foreign individuals in a bank 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 (Sec 2). Different classifications of banks 1. Universal banks - Primarily governed by the General Banking Law (GBL). They can exercise the powers of an investment house and invest in non-allied enterprises and have the highest capitalization requirement. 2. Commercial banks - Ordinary banks governed by the GBL which have a lower capitalization requirement than universal banks and can neither exercise the powers of an investment house nor invest in non-allied enterprises.

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MERCANTILE LAW Universal banks v. Commercial banks v. Thrift banks

Governing Laws Powers

Capitalization

Equity Investment

Non- Allied Transaction

Total Amount of Investment Equity Single Equity Investment

UNIVERSAL BANKS General Banking Law (GBL) 1. Has the authority to exercise the powers of a commercial bank. 2. To act as an investment house – a corporation that sells and guarantees sale of securities and shares of stocks. i.e. Petron will tap an investment house in order to sell its stocks. 3. To engage in a non-allied undertaking – which is not related at all to banking. e.g. Realty 4.95 Billion

COMMERCIAL BANKS GBL To engage in allied undertakings and, in addition to the general powers incident to a corporation, may exercise all such powers as may be necessary to carry on the business of commercial banking.

THRIFT BANKS Thrift Banks Act (R.A. 7906) All the powers of a commercial bank, except: 1. To issue imported LC 2. To accept or open checking account except with prior approval by the Monetary Board (MB requires at least a net asset worth of 28M)

NOTE: Allied undertakings are those activities or entities which enhance or complement banking.

2.4 Billion

1. Metro Manila – 1 Billion 2. Cebu and Davao – 500 Million 3. Elsewhere 250 Million (BSP Circular No. 0715, Apr 2011) Only allied undertaking

Only allied undertaking Can be a stock holder in both allied and non-allied undertaking Can invest but shall not Cannot invest Cannot invest exceed 25% of the investee (receiving) corporation. Not to exceed 50% of the Not to exceed 35% of Not to exceed 35% of bank’s net worth. bank’s net worth. bank’s net worth. Not to exceed 25% of bank’s net worth

DISTINCTION OF BANKS FROM QUASI-BANKS AND TRUST ENTITIES

in trust or on deposit for the use, benefit, or behalf of others (Sec. 79). A bank does not act as a trustee.

Quasi-bank

Financial intermediaries

These are entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of re-lending or purchasing of receivables and other obligations (Sec 4). Unlike banks, quasi-banks do not accept deposits. Neither are funds obtained insured with the PDIC.

Persons or entities whose principal functions include the lending, investing, or placement of funds on pieces of evidence of indebtedness or equity deposited with them, acquired by them or otherwise coursed through them, either for their own account or for the account of others. Deposit substitutes

Trust entities It is an alternative form of obtaining funds from the public, other than deposits, through the issuance, endorsement, or acceptance of debt instruments, for the borrower's own account, for the purpose of

These are entities engaged in trust business that act as a trustee or administer any trust or hold property

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BANKING LAWS relending or purchasing of receivables and other obligations. These instruments may include, but need not be limited to, banker’s acceptances, promissory notes, participations, certificates of assignment and similar instruments with recourse, and repurchase agreements.

and responsibility of the organizers and administrators reasonably assure the safety of deposits and the public interest. (ibid). General powers and functions of a bank 1. Accepting drafts and issuing letters of credit 2. Discounting and negotiating promissory notes, drafts, bills of exchange and other instrument evidencing debt 3. Accepting or creating demand deposits, receiving other types of deposit and deposit substitutes 4. Buying and selling FOREX and gold or silver bullion 5. Acquiring marketable bonds and other debt securities 6. Extending credit 7. Determination of bonds and other debt securities eligible for investment including maturities and aggregate amount of such investment, subject to such rules as the Monetary Board may promulgate. 8. And all other powers as may be necessary to carry on the business of a bank (Sec. 29, GBL).

Q: XYZ Corporation is engaged in lending funds to small vendors in various public markets. To fund the lending, XYZ Corporation raised funds through borrowings from friends and investors. Which statement is most accurate? (2012 Bar Question) a. XYZ Corporation is a bank. b. XYZ Corporation is a quasi-bank. c. XYZ Corporation is an Investment Company. d. XYZ is none of the above. A: B. XYZ Corporation is a quasi bank BANK POWERS AND LIABILITIES CORPORATE POWERS 1. All powers provided by the corporation code, like issuance of stocks and entering into merger or consolidation with other corporation or banks. 2. It can only acquire real property when it is needed for business, in settlement of debt incurred in the course of the business, property as may be mortgaged to it to secure a debt in good faith and property it may acquire during execution sale to satisfy judgment. Banks cannot acquire real property in settlement of a civil liability arising from crime. 3. A universal and commercial bank can both invest in equity but only universal bank is allowed to invest in equity of non-allied enterprises.

Rules regarding the issuance of stocks by a bank 1. The Monetary Board may prescribe rules and regulations on the types of stock a bank may issue. 2. Banks shall issue par value stocks only (Sec. 9, GBL). 3. GR: No bank shall purchase or acquire shares of its own capital stock or accept its own shares as a security for a loan. XPN: When authorized by the Monetary Board. NOTE: That in every case the stock so purchased or acquired shall, within six months from the time of its purchase or acquisition, be sold or disposed of at a public or private sale. (Sec 10, GBL)

BANKING AND INCIDENTAL POWERS 4. Foreign individuals and non-bank corporations may own or control up to 40% of the voting stock of a domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations.

Certificate of Authority to Register This is a requirement before a bank may register or amend their articles of incorporation with SEC. It is issued by the Monetary Board. (sec. 14, GBL) The following must be proven by the bank to satisfy the Monetary Board and in order for the latter to grant such certificate: 1. 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 2. That the public interest and economic conditions, both general and local, justify the authorization 3. The amount of capital, the financing, organization, direction and administration, as well as the integrity

NOTE: 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. (Sec 11, GBL)

5. Stockholdings of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests and must be fully disclosed

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MERCANTILE LAW in all transactions by such corporations or related groups of persons with the bank. (Sec 12, GBL) 6. Two or more corporations owned or controlled by the same family group or same group of persons (Corporate Stockholdings)shall be considered related interests and must be fully disclosed in all transactions by such corporations or related group of persons with the bank. (Sec 13, GBL)

exceptional cases and when the circumstances warrant, such as but not limited to the following: 1. When a bank is under comptrollership or conservatorship 2. When a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner 3. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition (Sec. 18, GBL).

Instances when a bank is prohibited from declaring dividends

DILIGENCE REQUIRED BY BANKS 1. Its clearing account with the Bangko Sentral is overdrawn; or 2. It is deficient in the required liquidity floor for government deposits for five or more consecutive days, or 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 4. It has committed a major violation as may be determined by the Bangko Sentral (Sec. 57, GBL).

Degree of diligence required of banks in handling deposits Banks are expected to exercise extraordinary diligence in its dealings with depositors. Consequently, the diligence required of banks is more than that of a Roman pater familias or a good father of a family (PCI Bank v Balcameda G.R. No. 158143, September 21, 2011). Degree of diligence required of banks with its other dealings

Independent directors in banks Section 16 of the GBL provides for two (2).

The diligence more than that of a Roman pater familias only applies only to cases where banks act under their fiduciary capacity, that is, as depositary of the deposits of their depositors. The same degree of diligence is not expected to be exerted by banks in commercial transactions (Reyes v CA G.R. No. 118492. August 15, 2001).

Effect of merger or consolidation of banks to the number of directors allowed The number of directors may be more than 15 but should not exceed 21 (Sec. 17, GBL). Q: XXX Bank Corporation and ZZZ Corporation were merged into XX ZZ Bank Corporation. So as not to create any unnecessary conflict, all the former directors of both banks wanted to be appointed /elected as members of the Board of Directors of the merged bank. Each bank used to have eleven (11) members of the board. The maximum number of directors of the merged bank is - (2012 Bar Question) a. 15; b. 22; c. 21; d. 11.

Effect when the teller gave the passbook to a wrong person Banks must exercise a high degree of diligence in insuring that they return the passbook only to the depositor of his authorized representative. For failing to return the passbook to authorized representative of the depositor, the bank presumptively failed to observe such high degree of diligence in safeguarding the passbook and insuring its return to the party authorized to receive the same. However, a bank’s liability may be mitigated by the depositor’s contributory negligence such as allowing a withdrawal slip signed by authorized signatories to fall into the hands of an impostor (Consolidated Bank and Trust Corporation vs. CA, GR No, 138569, September 11, 2003).

A: C. In case of a merged bank, the maximum number of directors is 21. Limitation on the grant of compensation to the directors by the Monetary Board

Bank is liable when an employee encashed a check without the required indorsement

The Monetary Board may limit the grant of compensation to the directors of a bank only in UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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BANKING LAWS The fiduciary nature of the relationship between the bank and the depositors must always be of paramount concern (Philippine Savings Bank vs. Chowking, G.R. No. 177526, July 04, 2008).

2. 3.

NOTE: Deposit accounts may also be classified as: 1. Individual; or 2. Joint: a. “And” account – the signature of both co-depositors are required for withdrawals. b. “And/or” account – either one of the co-depositors may deposit and withdraw from the account without the knowledge consent and signature of the other.

NATURE OF BANK FUNDS AND BANK DEPOSITS Deposit function of banks The function of the bank to receive a thing, primarily money, from depositors with the obligation of safely keeping it and returning the same.

Joint accounts may be subject of a survivorship agreement whereby the co-depositors 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 (Vitug v. CA, G.R. No. 82027, March 29, 1990).

Kinds of deposits between a bank and its depositors 1. 2.

Current Time

As debtor-creditor: Special Kinds of Deposits a. Demand deposits – all those liabilities of banks which are denominated in the Philippine currency and are subject to payment in legal tender upon demand by representation of checks. b. Savings deposits – the most common type of deposit and is usually evidenced by a passbook.

Anonymous account GR: Anonymous accounts or those under fictitious names are prohibited (R.A. 9160 as amended by by R.A. 9194; BSP Circular No. 251, July 21, 2000). XPN: In case where numbered accounts is allowed such as in foreign currency deposits. However, banks/non-bank financial institutions should ensure that the client is identified in an official or other identifying documents (Sec. 8, R.A. 6426 as amended, FCDA).

NOTE: The requirement of presentation of passbooks is required by the Manual of Regulations for Banks. A bank is negligent if it allows the withdrawal without requiring the presentation of passbook (BPI v. CA, GR No. 112392, Feb. 29, 2000).

Nature of a bank deposit c.

d.

3.

Negotiable order of withdrawal account (NOWA) – Interest-bearing deposit accounts that combine the payable on demand feature of checks and investment feature of saving accounts. Time deposit – an account with fixed term; payment of which cannot be legally required within such a specified number of days.

All kinds of bank deposits are loan. The bank can make use as its own the money deposited. Said amount is not being held in trust for the depositor nor is it being kept for safekeeping (Tang Tiong Tick v. American Apothecaries, G.R. No. 43682, Mar. 31, 1938). Mandamus will not lie in the enforcement of obligations concerning deposit

As trustee-trustor: All kinds of deposit are loans. Thus, the relationship being contractual in nature, mandamus cannot be availed of because mandamus will not lie to enforce the performance of contractual obligations (Lucman v. Alimatar Malawi, G.R. No. 159794, Dec. 19, 2006).

NOTE: Trust account – a savings account, established under a trust agreement containing funds administered by the bank for the benefit of the trustor or another person or persons.

4.

As agent-principal: a. Deposit of checks for collection b. Deposit for specific purpose c. Deposit for safekeeping

Contract between banks and depositors is not a trust agreement The fiduciary nature of the bank-depositor relationship does not convert the contract between banks and depositors to a trust agreement. Thus, failure by the bank to pay the depositor is failure to pay simple loan, and not a breach of trust

Types of deposit accounts 1.

Savings

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MERCANTILE LAW (Consolidated Bank and Trust Corp. v. CA, G.R. No. 138569, Sept. 11, 2003).

demanded although the obligation may be silent upon this point.

Nature of safety deposit box

New rule

The contract for the use of a safety deposit box should be governed by the law on lease.

Through Circular No. 799, the Monetary Board declared that effective July 1, 2013 the rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in judgments, in the absence of an express contract as to such rate of interest, shall be 6 percent per annum (Section 1, Circular 799, Seies of 2013 amending Section 2 of Circular No. 905, Series of 1982).

In the case of Sia vs. CA and Security Bank and Trust Company and under the old banking law, a safety deposit box is a special deposit. However, the new General Banking Law, while retaining the renting of safe deposit box as one of the services that the bank may render, deleted reference to depository function (Divina, Handbook on Philippine Commercial Law).

This means that if the parties fail to state in writing the interest payable on any of the transactions mentioned, or on account of a court judgment involving a related money claim, the imposable interest is 6 percent every year.

Q: After procuring a checking account, the depositor issued several checks. He was surprised to learn later that they had been dishonored for insufficient funds. Investigation disclosed that deposits made by the depositor were not credited to its account. Is the bank liable for damages?

A bank was forbidden by Central Bank to do business is NOT obligated to pay interest on deposit

A: Yes, the depositor expects the bank to treat his account with utmost fidelity, whether such account consist only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the dishonor of the check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation (Simex Intl. v. CA, G.R. No. 88013, Mar. 19, 1990).

A bank lends money, engages in international transactions, acquires foreclosed mortgaged properties or their proceeds and generally engages in other banking and financing activities in order that it can derive income therefrom. Therefore, unless a bank can engage in those activities from which it can derive income, it is inconceivable how it can carry on as a depository obligated to pay interest on money deposited with it (Fidelity & Savings and Mortgage Bank v. Cenzon, G.R. No. L-46208, Apr. 5, 1990). GRANT OF LOANS AND SECURITY REQUIREMENTS RATIO OF NET WORTH TO TOTAL RISK ASSETS Net worth

STIPULATION ON INTERESTS The total of the unimpaired paid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as may be required by the BSP (Sec. 24.2).

Rules on stipulation of interests Old rule 1. Central Bank Circular 416 – 12% per annum in cases of: a. Loans b. Forbearance of money, goods and credits c. Judgment involving such loan or forbearance, in the absence of express agreement as to such rate of interest

Risked based capital The minimum ratio prescribed by the Monetary Board which the net worth of a bank must bear to its total risk assets which may include contingent accounts. NOTE: The Monetary Board may require or suspend compliance with such ratio whenever necessary for a maximum period of one year and that such ratio shall be applied uniformly to banks of the same category (Sec. 34).

2. Interest accruing from unpaid interest– interest due shall earn interest from the time it is judicially

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BANKING LAWS Effect of non-compliance with the ratio

b. Officer c. Stockholder, having at least 1% ownership over the bank d. Related Interests, such as DOS’s spouses, their relatives within the first degree whether by consanguinity or affinity, partnership whereby DOS is a partner or a corporation where DOS owns at least 20%.

1. Distribution of net profits may be limited or prohibited and MB 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; or 2. GR: Acquisition of major assets and making of new investments may be restricted. XPN: Purchases of evidence of indebtedness guaranteed by the Government can be exempted from restrictions (Sec. 34).

Exclusions from the aforesaid loan limitations Non-risk loans, such as: 1. Loans secured by obligations of the Bangko Sentral ng Pilipinas or the Philippine Government 2. Loans fully guaranteed by the Government 3. Loans covered by assignment of deposits maintained in the lending bank and held in the Philippines 4. Loans, credit accommodations and acceptances under letters of credit to the extent covered by margin deposits 5. Other loans or credit accommodations which the MB may specify as non-risk items.

SINGLE BORROWER’S LIMIT Limitations imposed upon banks with respect to its loan function 1. GR: Single borrower’s limit – The total amount of loans, credit accommodations and guarantees that the bank could grant should at no time exceed 25% of the bank’s net worth (Sec 35.1, GBL). XPN: a. As the Monetary Board may otherwise prescribe for reasons of national interest b. Deposits of rural banks with government-owned or controlled financial institutions like LBP, DBP, and PNB.

Joint and solidary signature (JSS) practice It is a common banking practice requiring as an additional security for a loan granted to a corporation the joint and solidary signature of a major stockholder or corporate officer of the borrowing corporation (Security Bank v. Cuenca, G.R. No. 138544, Oct. 3, 2000).

2. The total amount of loans, credit accommodations and guarantees prescribed in (a) may be increased by an additional 10% of the net worth of such bank provided that additional liabilities are adequately secured by trust receipt, shipping documents, warehouse receipts and other similar documents which must be fully covered by an insurance (Sec. 35.2, GBL). 3. Loans and other credit accommodations secured by REM shall not exceed 75% of the appraised value of the real estate security plus 60% of the appraised value of the insured improvements (Sec. 37, GBL) CM/intangible property such as patents, trademarks, etc. shall not exceed 75% of the appraised value of the security (Sec. 38, GBL). 4. Loans being contractual, the period of payment may be subject to stipulation by the parties. In the case of amortization, the amortization schedule has no fixed period as it depends on the project to be financed such that if it was capable of raising revenues, it should be at least once a year with a grace period of 3 years if the project to be financed is not that profitable which could be deferred up to 5 years if the project was not capable of raising revenues (Sec. 44, GBL). 5. Loans granted to DOSRI: a. Director

RESTRICTIONS ON BANK EXPOSURE TO DOSRI (DIRECTORS, OFFICERS, STOCKHOLDERS AND THEIR RELATED INTERESTS) Requirements that must be complied with in case of DOSRI accounts 1. Procedural requirement - Loan must be approved by the majority of all the directors not including the director concerned. CB approval is not necessary; however, there is a need to inform them prior to the transaction. Loan must be entered in the books of the corporation (Sec. 36). 2. Substantive requirement - Loan must not exceed the paid in contribution and unencumbered deposits. (Not to exceed 15% of the portfolio or 100% of the net worth, whichever is lower) (Sec. 36 [4]). In the case of Go v. BSP (October 23, 2009) it was held that the requirements are: (1) Approval requirement which means that the DOSRI transaction must be approved by at least majority of the directors excluding the director concerned. (2) Reportorial

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MERCANTILE LAW requirement means that the transaction must be recorder in the books of the bank and reported to the BSP. (3) Ceiling requirement which means that the amount of the loan shall not exceed the book valued of the paid-in contribution and the amount of the unencumbered deposits. Three different offenses are committed by those who fail to observe the board approval, reporting and ceiling requirements. Effect of non-compliance with the foregoing requirement Violation of DOSRI is a crime and carries with it penal sanction. It does not make the transaction void but only renders the responsible officers and directors criminally liable. (Republic v. Sandiganbayan, 648 SCRA 58). Transactions covered by the DOSRI regulation The transactions covered are loan and credit accommodation. Not being a loan, the ceiling will not apply to lease and sale. However, it should still comply with the procedural requirement. Arms-length rule It provides that any dealings of a bank with any of its DOSRI shall be upon terms not less favorable to the bank than those offered to others [Sec. 36 (2)]. The bank may terminate the loan and demand immediate payment if the borrower used the funds for purposes other than that agreed upon If the bank finds that the borrower has not employed the funds borrowed for the purpose agreed upon between the bank and the borrower, the bank may terminate the loan and demand immediate payment (Banco de Oro v. Bayuga, G.R. No. L-49568, Oct. 17, 1979).

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INTELLECTUAL PROPERTY LAWS TECHNOLOGY TRANSFER ARRANGEMENTS

Intellectual Property Laws

Technology transfer arrangement INTELLECTUAL PROPERTY RIGHTS IN GENERAL Contracts or agreements involving the transfer of systematic knowledge for the manufacture of a product, the application of the process, or rendering of a service including management contracts; and the transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for mass market (Sec. 4.2, IPC).

INTELLECTUAL PROPERTY RIGHTS Coverage of intellectual property rights (CTG- IPLP) 1. 2. 3. 4. 5. 6.

Copyright and Related Rights; Trademarks and Service Marks; Geographic indications; Industrial designs; Patents; Layout designs (Topographies) of Integrated Circuits; 7. Protection of Undisclosed Information (TRIPS).

Nature of technology transfer arrangement Technology transfer arrangement is in the nature of a Voluntary License Contract. It is a contract between an intellectual property right owner (licensor) and a second party (licensee), authorizing the latter to commercially exploit the same intellectual property right under specified terms and conditions (Salao, 2012 p. 34).

DIFFERENCES BETWEEN COPYRIGHTS, TRADEMARKS, AND PATENT Trademark v. Patent v. Copyright INTELLECTUAL PROPERTIES

Undisclosed information

DEFINITION

It is an information which: 1. Is a secret in the sense that it is not, as a body or in precise configuration and assembly of components, generally known among, or readily accessible to persons within the circles that normally deal with the kind of information in question. 2. Has commercial value because it is a secret 3. Has been subjected to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it a secret (Article 39, TRIPS Agreement).

Any visible sign capable of distinguishing the goods (trademark) or services (service mark) of Trademark an enterprise and shall include a stamped or marked container of goods. The name or designation identifying or Tradename distinguishing an enterprise. Literary and artistic works which are original intellectual creations in Copyright the literary and artistic domain protected from the moment of their creation. Any technical solution of a problem in any field of human activity which is Patentable Inventions new, involves an inventive step and is industrially applicable. (Kho v. CA, G.R. No. 115758, Mar. 19, 2002)

Nature of undisclosed information or trade secret Those trade secrets are of a privileged nature. The protection of industrial property encourages investments in new ideas and inventions and stimulates creative efforts for the satisfaction of human needs. It speeds up transfer of technology and industrialization, and theresby bring about social and economic progress. Verily, the protection of industrial secrets is inextricably linked to the advancement of our economy and fosters healthy competition in trade (Air Philippines Corporation v. Pennswell, Inc., G.R. No. 172835, Dec. 13, 2007).

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MERCANTILE LAW PATENTS

date of the application. Provided, that the application which has validly claimed the filing date of an earlier application under Section 31 of the IPC, there shall be a prior art with effect as of the filing date of such earlier application: Provided further, that the applicant or the inventor identified in both applications are not one and the same (Sec. 24, IPC).

A set of exclusive rights conferred by the State to an inventor or his legal successor, for a limited period of time to exclude others from making, using, selling or importing the invention within the territory of the country that grants the patent, in exchange for the disclosure of the invention to the public.

Coverage of patents PATENTABLE INVENTIONS 1. Invention – creation of an object which does not exist in nature; it requires novelty, inventive step and industrial application for patentability. 2. Utility Model - any technical solution of a problem in any field of human activity which is new and industrially applicable. It may be, or may relate to, a product, or process, or an improvement of any of the aforesaid. It is sometimes referred to as a device or useful object. 3. Industrial Design – the utility value or ornamental/aesthetic aspect of a useful article (Vicente Amador, Intellectual Property Fundamentals, 2007).

Patentable inventions Any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable. It may be, or may relate to, a product, or process, or an improvement of any of the foregoing (Sec. 21, IPC). Product patent v. Process patent PRODUCT PATENT The right to make, use, sell and import the product.

PROCESS PATENT The right to restrain, prevent or prohibit any unauthorized person or entity from using the process, and from manufacturing, dealing in, using, selling or offering for sale, or importing any product obtained directly or indirectly from such process. (Sec. 71, IPC)

Rules on public disclosure GR: When a work has already been made available to the public, it shall be non-patentable for absence of novelty.

1. Novelty – An invention shall not be considered new if it forms part of a prior art (Sec. 23, IPC). 2. Inventive step –if, having regard to prior art, it is not obvious to a person skilled in the art at the time of the filing date or priority date of the application claiming the invention. 3. Industrially Applicable – An invention that can be produced and used in any industry (Sec. 27, IPC).

XPNs: Non-prejudicial disclosure – the disclosure of information contained in the application during the 12-month period before the filing date or the priority date of the application if such disclosure was made by: 1. The inventor; 2. A patent office and the information was contained: a. In another application filed by the inventor and should have not have been disclosed by the office, or b. In an application filed without the knowledge or consent of the inventor by a third party which obtained the information directly or indirectly from the inventor; 3. A third party which obtained the information directly or indirectly from the inventor (Sec. 25, IPC).

Prior art

Burden of proving want of novelty of an invention

1. Everything which has been made available to the public anywhere in the world, before the filing date or the priority date of the application claiming the invention 2. The whole contents of a published application, filed or effective in the Philippines, with a filing or priority date that is earlier than the filing or priority

The burden of proving want of novelty is on him who avers it and the burden is a heavy one which is met only by clear and satisfactory proof which overcomes every reasonable doubt (Manzano v. CA, G.R. No. 113388, Sept. 5, 1997).

Conditions for patentability (NIA)

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INTELLECTUAL PROPERTY LAWS Inventive step

3. Layout design/topography – The three dimensional disposition, however expressed, of the elements, at least one of which is an active element, and of some or all of the interconnections of an integrated circuit, or such a three-dimensional disposition prepared for an integrated circuit intended for manufacture. Registration is valid for 10 years without renewal counted from date of commencement of protection. 4. Utility model – A name given to inventions in the mechanical field

GR: An invention involves an inventive step if, having regard to prior art, it is not obvious to a person skilled in the art at the time of the filing date or priority date of the application claiming the invention (Sec. 26, IPC). XPN: In the case of drugs and medicines, there is no inventive step if the invention results from the mere discovery of a new form or new property of a known substance which does not result in the enhancement of the known efficacy of that substance (Sec. 26.2, as amended by R.A. 9502)

Requisites for an invention to be considered as a utility model If it is new and industrially applicable. A model of implement or tools of any industrial product even if not possessed of the quality of invention but which is of practical utility (Sec. 109.1, IPC).

Test of non-obviousness If any person possessing ordinary skill in the art was able to draw the inferences and he constructs that the supposed inventor drew from prior art, then the latter did not really invent.

Term of a utility model 7 years from date of filing of the application (Sec. 109.3, IPC).

Person of ordinary skill A person of ordinary skill is one who is presumed to: 1. Be an ordinary practitioner aware of what was common general knowledge in the art at the relevant date. 2. Have knowledge of all references that are sufficiently related to one another and to the pertinent art and to have knowledge of all arts reasonably pertinent to the particular problems with which the inventor was involved. 3. Have had at his disposal the normal means and capacity for routine work and experimentation (Rule 207 Rules and Regulations on Inventions).

NON-PATENTABLE INVENTIONS Non-patentable inventions (PAD-SCAD) 1. Plant varieties or animal breeds or essentially biological process for the production of plants or animals. This provision shall not apply to micro-organisms and non-biological and microbiological processes 2. Aesthetic creations 3. Discoveries, scientific theories and mathematical methods 4. Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computers 5. Anything which is Contrary to public order or morality (Sec. 22, IPC as amended by R.A. 9502). 6. Methods for treatment of the human or Animal body 7. In the case of Drugs and medicines, mere discovery of a new form or new property of a known substance which does not result in the enhancement of the efficacy of that substance

Other forms of patentable inventions 1. Industrial design– Any composition of lines or colors or any three-dimensional form, whether or not associated with lines or colors. Provided that such composition or form gives a special appearance to and can serve as pattern for an industrial product or handicraft (Sec. 112, IPC). NOTE: Generally speaking, an industrial design is the ornamental or aesthetic aspect of a useful article (Amador , 2007).

Patentability of computer programs

2. Integrated circuit – A product, in its final form, or an intermediate form, in which the elements, at least one of which is an active elements and some of all of the interconnections are integrally formed in and or on a piece of material, and in which is intended to perform an electronic function.

GR: Computer programs are not patentable but are copyrightable. XPN: They can be patentable if they are part of a process (e.g. business process with a step involving the use of a computer program).

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UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW Person who may apply for a patent Q: Supposing Albert Einstein were alive today and he filed with the Intellectual Property Office (IPO) an application for patent for his theory of relativity expressed in the formula E=mc2. The IPO disapproved Einstein's application on the ground that his theory of relativity is not patentable. Is the IPO's action correct? (2006 Bar Question)

Any person who is a national or who is domiciled or has a real and effective industrial establishment in a country which is a party to any convention, treaty or agreement relating to intellectual property rights or the repression of unfair competition, to which the Philippines is also a party, or extends reciprocal rights to nationals of the Philippines by law ( Sec. 3, IPC).

A: Yes, the IPO is correct because under the Intellectual Property Code, discoveries, scientific theories and mathematical methods, are classified to be as "non¬patentable inventions". Einstein's theory of relativity falls within the category of being a non-patentable "scientific theory".

Steps in the registration of a patent The procedure for the grant of patent may be summarized as follows: (FAFCS – PuSGraPI) 1. Filing of the application 2. Accordance of the filing date 3. Formality examination 4. Classification and Search 5. Publication of application 6. Substantive examination 7. Grant of Patent 8. Publication upon grant 9. Issuance of certificate (Salao, 2008).

OWNERSHIP OF A PATENT RIGHT TO A PATENT Persons entitled to a patent 1. Inventor, his heirs, or assigns (Sec 28, IPC). 2. Joint invention – Jointly by the inventors (Sec. 28, IPC). 3. Two or more persons invented separately and independently of each other – To the person who filed an application ; 4. Two or more applications are filed – the applicant who has the earliest filing date or, the earliest priority date. First to file rule (Sec. 29, IPC). 5. Inventions created pursuant to a commission – Person who commissions the work, unless otherwise provided in the contract (Sec. 30.1, IPC). 6. Employee made the invention in the course of his employment contract: a. The employee, if the inventive activity is not a part of his regular duties even if the employee uses the time, facilities and materials of the employer. b. The employer, if the invention is the result of the performance of his regularly-assigned duties, unless there is an agreement, express or implied, to the contrary (Sec. 30.2, IPC).

Manner of making disclosure The application shall disclose the invention in a manner sufficiently clear and complete for it to be carried out by a person skilled in the art. Claim Defines the matter for which protection is sought. Each claim shall be clear and concise, and shall be supported by the description. Abstract A concise summary of the disclosure of the invention as contained in the description, claims and merely serves as technical information. Unity of invention

FIRST-TO-FILE RULE The application shall relate to one invention only or to a group of inventions forming a single general inventive concept (Sec. 38.1). If several independent inventions which do not form a single general inventive concept are claimed in one application, the application must be restricted to a single invention (Sec. 38.2, IPC).

First-to-file rule The First-to-File rule states that: 1. If two (2) or more persons have made the invention separately and independently of each other, the right to the patent shall belong to the person who filed an application for such invention, or 2. Where two or more applications are filed for the same invention, to the applicant which has the earliest filing date. (Sec. 29, IPC).

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Concept of divisional applications Divisional applications come into play when two or more inventions are claimed in a single application

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INTELLECTUAL PROPERTY LAWS but are of such a nature that a single patent may not be issued for them. The applicant, is thus required to “divide”, that is, to limit the claims to whichever invention he may elect, whereas those inventions not elected may be made the subject of separate applications which are called “divisional applications” (Smith-Kline Beckman Corp. v. CA, GR No. 126627, Aug. 14, 2003).

RIGHT OF PRIORITY Priority date An application for patent filed by any person who has previously applied for the same invention in another country which by treaty, convention, or law affords similar privileges to Filipino citizens, shall be considered as filed as of the date of filing the foreign application (Sec. 31, IPC).

INVENTIONS CREATED PURSUANT TO A COMMISSION

Note: Filing Date is accorded only when all the “requirements” provided under Section 40 are present. Priority Date comes into play when there is an application for patent for the same invention that was filed in another country (Salao, 2012).

Pursuant to a commission The person who commissions the work shall own the patent, unless otherwise provided in the contract.

Conditions in availing of priority date

Pursuant to employment

1. The local application expressly claims priority; 2. It is filed within 12 months from the date the earliest foreign application was filed; and 3. A certified copy of the foreign application together with an English translation is filed within 6 months from the date of filing in the Philippines (Sec. 31, IPC).

In case the employee made the invention in the course of his employment contract, the patent shall belong to: (a) The employee, if the inventive activity is not a part of his regular duties even if the employee uses the time, facilities and materials of the employer;

Q: Leonard and Marvin applied for Letters Patent claiming the right of priority granted to foreign applicants. Receipt of petitioners’ application was acknowledged by respondent Director on March 6, 1954. Their Application for Letters Patent in the US for the same invention indicated that the application in the US was filed on March 16, 1953. They were advised that the "Specification" they had submitted was "incomplete" and that responsive action should be filed with them four months from date of mailing, which was August 5, 1959. On July 3, 1962, petitioners submitted two complete copies of the Specification. Director of patents held that petitioners' application may not be treated as filed. Is the director correct?

(b) The employer, if the inventive activity is the result of the performance of his regularly-assigned duties, unless there is an agreement, express or implied, to the contrary (Sec. 30, IPC). Q. X works as a research computer engineer with the Institute of Computer Technology, a government agency. When not busy with his work, but during office hours, he developed a software program for law firms that will allow efficient monitoring of the cases, which software is not at all related to his work. Assuming the program is patentable, who has the right over the patent? (2012 MCQ Bar Question No.82)

A: Yes, it is imperative that the application be complete in order that it may be accepted. It is essential to the validity of Letters Patent that the specifications be full, definite, and specific. The purpose of requiring a definite and accurate description of the process is to apprise the public of what the patentee claims as his invention, to inform the Courts as to what they are called upon to construe, and to convey to competing manufacturers and dealers information of exactly what they are bound to avoid. To be entitled to the filing date of the patent application, an invention disclosed in a previously filed application must be described within the instant application in such a manner as to enable

A. X. In case the employee made the invention in the course of his employment contract, the patent belongs to the employee, if the inventive activity is not part of his regular duties even if the employee uses the time, facilities and materials of the employer.

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MERCANTILE LAW one skilled in the art to use the same for a legally adequate utility (Boothe v. Director of Patents, G.R. No. L-24919, Jan. 28, 1980).

periods of five (5) years each. (Sec. 118.2, IPC)

Rights conferred by a patent application after the first publication

GROUNDS FOR CANCELLATION OF A PATENT Grounds for cancellation of patents

The applicant shall have all the rights of a patentee against any person who, without his authorization, exercised any of the rights conferred under Section 71 in relation to the invention claimed in the published patent application, as if a patent had been granted for that invention, provided that the said person had:

Any interested party may petition to cancel any patent or any claim or parts of a claim any of the following grounds: (NDCIS) 1. The invention is Not new or patentable; 2. The patent does not Disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or 3. Contrary to public order or morality (IPC, Sec. 61.1). 4. Patent is found Invalid in an action for infringement (IPC, Sec. 82) 5. The patent includes matters outside the Scope of the disclosure contained in the application (IPC, Sec 21, Regulations on Inter Partes Proceeding, Sec.1).

1. Actual knowledge that the invention that he was using was the subject matter of a published application; or 2. Received written notice that the invention was the subject matter of a published application being identified in the said notice by its serial number NOTE: That the action may not be filed until after the grant of a patent on the published application and within four (4) years from the commission of the acts complained of (Sec. 46, IPC).

Ground/s for cancellation that relate to some of the claims or parts of the claim only Cancellation may be effected to such extent only. (Sec. 61.2, IPC)

Effectivity of a patent A patent shall take effect on the date of the publication of the grant of the patent in the IPO Gazette (Sec. 50.3, IPC).

Grounds for cancellation of a utility model (QCNO) 1. The invention does not Qualify for registration as a utility model 2. That the description and the claims do not Comply with the prescribed requirements 3. Any drawing which is Necessary for the understanding of the invention has not been furnished 4. That the Owner of the utility model registration is not the inventor or his successor in title (IPC, Sec. 109.4).

Duration of protection of an invention, utility model and industrial design FORM INVENTION

Letters patent

UTILITY MODEL

Utility Model Registration

INDUSTRIAL DESIGN

Certificate of registration

TERM OF PROTECTION 20 years from date of filing of application without renewal. (Sec. 54, IPC) 7 years from the filing date of the application without renewal. (Sec. 109.3, IPC)

Grounds for cancellation of an industrial design 1. The subject matter of the industrial design is not registrable; 2. The subject matter is not new; or 3. The subject matter of the industrial design extends beyond the content of the application as originally filed (IPC, Sec. 120).

5 years from the filing date of the application, renewable for not more than two (2) consecutive

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INTELLECTUAL PROPERTY LAWS

Remedies of persons not having the right to a patent

b. Assuming that it is patentable, who is entitled to the patent? What, if any, is the remedy of the losing party? (2005 Bar Question)

If a person other than the applicant is declared by final court order or decision as having the right to a patent, he may within 3 months after such decision has become final: 1. Prosecute the application as his own 2. File a new patent application 3. Request the application to be refused; or 4. Seek cancellation of the patent (Sec.67.1, IPC).

A: a. Yes because it is new, it involves an inventive step and it is industrially applicable. b. Francis is entitled to the patent, because he had the earlier filing date. The remedy of Cezar is to file a petition in court for the cancellation of the patent of Francis on the ground that he is the true and actual inventor, and ask for his substitution as patentee.

REMEDY OF THE TRUE AND ACTUAL INVENTOR

RIGHTS CONFERRED BY A PATENT

Remedies of the true and actual inventor

Rights conferred by a patent

If a person, who was deprived of the patent without his consent or through fraud is declared by final court order or decision to be the true and actual inventor, the court shall order for his substitution as patentee, or at the option of the true inventor, cancel the patent, and award actual damages in his favor if warranted by the circumstances (Sec. 68, IPC).

1. Subject matter is a product – Right to restrain, prohibit and prevent any unauthorized person or entity from making, using, offering for sale, selling or importing the product. 2. Subject matter is a process – Right to restrain prohibit and prevent any unauthorized person or entity from manufacturing, dealing in, using, offering for sale, selling or importing any product obtained directly or indirectly from such process (Sec. 71, IPC). 3. Right to assign the patent, to transfer by succession, and to conclude licensing contracts (Sec. 71.2, IPC).

Publication of the court order In the two circumstances aforementioned, the court shall furnish the Office a copy of the order or decision which shall be published in the IPO Gazette within three (3) months from the date such order or decision became final and executor, and shall be recorded in the register of the Office (Sec. 69, IPC).

Effectivity of the rights conferred by a patent The rights conferred by a patent application take effect after publication in the Official Gazette (Sec 46, IPC).

Time to file action in court The actions indicated in Sections 67 and 68 shall be filed within one (1) year from the date of publication made in accordance with Sections 44 and 51, respectively (Sec. 70, IPC).

LIMITATIONS OF PATENT RIGHTS Limitations

Q: Cezar works in a car manufacturing company owned by Joab. Cezar is quite innovative and loves to tinker with things. With the materials and parts of the car, he was able to invent a gas-saving device that will enable cars to consume less gas. Francis, a co-worker, saw how Cezar created the device and likewise, came up with a similar gadget, also using scrap materials and spare parts of the company. Thereafter, Francis filed an application for registration of his device with the Bureau of Patents. Eighteen months later, Cezar filed his application for the registration of his device with the Bureau of Patents.

1. In general a. GR: If put on the market in the Philippines by the owner of the product, or with his express consent. XPN: Drugs and medicines - introduced in the Philippines or anywhere else in the world by the patent owner, or by any party authorized to use the invention (Sec. 72.1, as amended by R.A. 9502) b. Where the act is done privately and on a non-commercial scale or for a non-commercial purpose. (Sec. 72.2, IPC)

a. Is the gas-saving device patentable? Explain.

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MERCANTILE LAW c. Exclusively for experimental use of the invention for scientific purposes or educational purposes (experimental use provision). (Sec. 72.3, IPC)

for and was granted a patent on his device, effective within the Philippines. As it turns out, a year before the grant of X's patent, Y, also an inventor, invented a similar device which he used in his cellphone business in Manila. But X files an injunctive suit against Y to stop him from using the device on the ground of patent infringement. Will the suit prosper? (2011 Bar Question)

d. Bolar Provision - In the case of drugs and medicines, where the act includes testing, using, making or selling the invention including any data related thereto, solely for purposes reasonably related to the development and submission of information and issuance of approvals by government regulatory agencies required under any law of the Philippines or of another country that regulates the manufacture, construction, use or sale of any product. (Sec. 72.4, IPC)

A: No, since Y is a prior user in good faith. Parallel importer One which imports, distributes, and sells genuine products in the market, independently of an exclusive distributorship or agency agreement with the manufacturer.

e. Where the act consists of the preparation for individual cases, in a pharmacy or by a medical professional, of a medicine in accordance with a medical prescription. (Sec. 72.5, IPC)

Doctrine of exhaustion Also known as the doctrine of first sale, it provides that the patent holder has control of the first sale of his invention. He has the opportunity to receive the full consideration for his invention from his sale. Hence, he exhausts his rights in the future control of his invention.

f. Where the invention is used in any ship, vessel, aircraft, or land vehicle of any other country entering the territory of the Philippines temporarily or accidentally. (Sec. 72.5, IPC) 2. Prior user– Person other than the applicant, who in good faith, started using the invention in the Philippines, or undertaken serious preparations to use the same, before the filing date or priority date of the application shall have the right to continue the use thereof, but this right shall only be transferred or assigned further with his enterprise or business. (Sec. 73, IPC)

It espouses that the patentee who has already sold his invention and has received all the royalty and consideration for the same will be deemed to have released the invention from his monopoly. The invention thus becomes open to the use of the purchaser without further restriction. (Adams v. Burke, 84 U.S. 17, 1873)

3. Use by Government– A government agency or third person authorized by the government may exploit invention even without agreement of a patent owner where:

Application of the doctrine of exhaustion in the Philippine jurisdiction GR: Patent rights are exhausted by first sale in the Philippines (Domestic exhaustion).

a. Public interest, as determined by the appropriate agency of the government, so requires; or b. A judicial or administrative body has determined that the manner of exploitation by owner of patent is anti-competitive. (Sec. 74, IPC)

XPN: On drugs and medicines: first sale in any jurisdiction exhausts the rights of the owner thereof (International exhaustion) (R.A. 9502). PATENT INFRINGEMENT

4. Reverse reciprocity of foreign law– Any condition, restriction, limitation, diminution, requirement, penalty or any similar burden imposed by the law of a foreign country on a Philippine national seeking protection of intellectual property rights in that country, shall reciprocally be enforceable upon nationals of said country, within Philippine jurisdiction. (Sec. 231, IPC)

Acts which constitute infringement of patent 1. Making, using, offering for sale, selling or importing a patented product or a product obtained directly or indirectly from a patented process; or 2. Use of a patented process without authorization of the owner of the patent (Sec. 76, IPC).

Q: X invented a device which, through the use of noise, can recharge a cellphone battery. He applied UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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INTELLECTUAL PROPERTY LAWS THE TEST IN PATENT INFRINGEMENT

he may omit any additions that he was compelled to add by patent office regulations.

Test in patent infringement Doctrine of contributory infringement 1. Literal infringement Test – Resort must be had, in the first instance, to words of the claim. If the accused matter clearly falls within the claim, infringement is committed.

Aside from the infringer, anyone who actively induces the infringement of a patent or provides the infringer with a component of a patented product or of a product produced because of a patented process knowing it to be especially adapted for infringing the patented invention and not suitable for substantial non-infringing use is liable jointly and severally with the infringer as a contributory infringer. It must be proven that the product can only be used for infringement purposes. If it can be used for legitimate purposes, the action shall not prosper.

Minor modifications are sufficient to put the item beyond literal infringement (Godines v. CA, G.R. No. L-97343, Sept. 13, 1993). 2. Doctrine of Equivalents– There is infringement where a device appropriates a prior invention by incorporating its innovative concept and, although with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result (Ibid.). 3. Economic interest test–when the process-discoverer’s economic interest are compromised, i.e., when others can import the products that result from the process, such an act is said to be prohibited.

Remedies of the owner of the patent against infringers 1. Civil action for infringement – The owner may bring a civil action with the appropriate Regional Trial Court to recover from infringer the damages sustained by the former, plus attorney’s fees and other litigation expenses, and to secure an injunction for the protection of his rights. (Sec 76.2, IPC) If the damages are inadequate or cannot be reasonably ascertained with reasonable certainty, the court may award by way of damages a sum equivalent to reasonable royalty (Sec 76.3, IPC). 2. Criminal action for infringement – If the infringement is repeated, the infringer shall be criminally liable and upon conviction, shall suffer imprisonment of not less than six (6) months but not more than three (3) years and/or a fine not less than P100,000.00 but not more than P300,000.00 3. Administrative remedy – Where the amount of damages claimed is not less than P200,000.00, the patentee may choose to file an administrative action against the infringer with the Bureau of Legal Affairs (BLA). The BLA can issue injunctions, direct infringer to pay patentee damages, but unlike regular courts, the BLA may not issue search and seizure warrants or warrants of arrest. 4. Destruction of Infringing material- The court may, in its discretion, order that the infringing goods, materials and implements predominantly used in the infringement be disposed of outside the channels of commerce of destroyed, without compensation (Sec.76.5, IPC).

Q: Does the use of a patented process by a third person constitute an infringement when the alleged infringer has substituted, in lieu of some unessential part of the patented process, a well-known mechanical equivalent? A: Yes, under the doctrine of mechanical equivalents, the patentee is protected from colorable invasions of his patent under the guise of substitution of some part of his invention by some well-known mechanical equivalent. It is an infringement of the patent, if the substitute performs the same function and was well known at the date of the patent as a proper substitute for the omitted ingredient (Gsell v. Yap-Jue, G.R. No. L-4720, Jan. 19, 1909). Meaning of “equivalent device” It is such as a mechanic of ordinary skill in construction of similar machinery, having the forms, specifications and machine before him, could substitute in the place of the mechanism described without the exercise of the inventive faculty. Doctrine of file wrapper estoppel This doctrine balances the doctrine of equivalents. Patentee is precluded from claiming as part of patented product that which he had to excise or modify in order to avoid patent office rejection, and

Limitations to the civil/criminal action 1. No damages can be recovered for acts of infringement committed more than four (4) years

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MERCANTILE LAW before the filing of the action for infringement (Sec. 79, IPC). 2. The criminal action prescribes in three (3) years from the commission of the crime (Sec. 84, IPC).

Prohibited clauses 1. Those which impose upon the licensee the obligation to acquire from a specific source capital goods, intermediate products, raw materials, and other technologies, or of permanently employing personnel indicated by the licensor; 2. Those pursuant to which the licensor reserves the right to fix the sale or resale prices of the products manufactured on the basis of the license; 3. Those that contain restrictions regarding the volume and structure of production; 4. Those that prohibit the use of competitive technologies in a non-exclusive technology transfer agreement; 5. Those that establish a full or partial purchase option in favor of the licensor; 6. Those that obligate the licensee to transfer for free to the licensor the inventions or improvements that may be obtained through the use of the licensed technology; 7. Those that require payment of royalties to the owners of patents for patents which are not used; 8. Those that prohibit the licensee to export the licensed product unless justified for the protection of the legitimate interest of the licensor such as exports to countries where exclusive licenses to manufacture and/or distribute the licensed product(s) have already been granted; 9. Those which restrict the use of the technology supplied after the expiration of the technology transfer arrangement, except in cases of early termination of the technology transfer arrangement due to reason(s) attributable to the licensee; 10. Those which require payments for patents and other industrial property rights after their expiration, termination arrangement; 11. Those which require that the technology recipient shall not contest the validity of any of the patents of the technology supplier; 12. Those which restrict the research and development activities of the licensee designed to absorb and adapt the transferred technology to local conditions or to initiate research and development programs in connection with new products, processes or equipment; 13. Those which prevent the licensee from adapting the imported technology to local conditions, or introducing innovation to it, as long as it does not impair the quality standards prescribed by the licensor; 14. Those which exempt the licensor for liability for non-fulfilment of his responsibilities under the technology transfer arrangement and/or liability arising from third party suits brought about by the

Persons who can file an action for infringement 1. The patentee or his successors-in-interest may file an action for infringement (Creser Precision Systems, Inc. v. CA, G.R. No. 118708, Feb. 2, 1998). 2. Any foreign national or juridical entity who meets the requirements of Sec. 3 and not engaged in business in the Philippines, to which a patent has been granted or assigned, whether or not it is licensed to do business in the Philippines (Sec. 77, IPC). DEFENSES IN ACTION FOR INFRINGEMENT Defenses in action for infringement (IGNDC) 1. Invalidity of the patent (Sec. 81, IPC); 2. Any of the Grounds for cancellation of patents: a. That what is claimed as the invention is not New or patentable b. That the patent does not Disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or c. That the patent is Contrary to public order or morality (Sec. 61, IPC). 3. Prescription LICENSING Modes of obtaining license to exploit patent rights 1. Voluntary licensing (Sec. 85, IPC) and 2. Compulsory licensing (Sec. 93, IPC). VOLUNTARY LICENSING Voluntary licensing The grant by the patent owner to a third person of the right to exploit a patented invention. Rights of a licensor in voluntary licensing In the absence of any provision to the contrary in the technology transfer arrangement, the grant of a license shall not prevent the licensor from granting further licenses to third person nor from exploiting the subject matter of the technology transfer arrangement himself (Sec. 89, IPC).

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INTELLECTUAL PROPERTY LAWS use of the licensed product or the licensed technology; and 15. Other clauses with equivalent effects (Sec. 87, IPC).

Jurisdiction

Exception on prohibited clauses

1.

COMPULSORY LICENSING

In exceptional or meritorious cases where substantial benefits will accrue to the economy, such as high technology content, increase in foreign exchange earnings, employment generation, regional dispersal of industries and/or substitution with or use of local raw materials, or in the case of Board of Investments, registered companies with pioneer status, exemption from any of the above requirements may be allowed by the Documentation, Information and Technology Transfer Bureau after evaluation thereof on a case by case basis (Sec. 91, IPC).

2.

NOTE: Clarification either by legislation of judicial interpretation as to who has jurisdiction should be made to avoid confusion (Salao, 2012).

Mandatory provisions 1.

2.

3.

4.

The Director of Legal Affairs may grant a license to exploit a patented invention, even without the agreement of the patent owner, in favor of any person who has shown his capability to exploit the invention (Sec. 93, IPC). R.A. 9502 (Universally Accessible Cheaper and Quality Medicines Act of 2008) however amended Sec. 93 so that it is the Director General of the IPO who may grant a license to exploit patented invention under the grounds enumerated therein.

Grounds for compulsory licensing and the period for filing a petition

That the laws of the Philippines shall govern the interpretation of the same and in the event of litigation, the venue shall be the proper court in the place where the licensee has its principal office; Continued access to improvements in techniques and processes related to the technology shall be made available during the period of the technology transfer arrangement; In the event the technology transfer arrangement shall provide for arbitration, the Procedure of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the Philippines or any neutral country; and The Philippine taxes on all payments relating to the technology transfer arrangement shall be borne by the licensor (Sec. 88, IPC).

1. 2.

3.

4.

5.

Effect of non-conformance with the prohibited clauses and mandatory provisions 6.

GR: Non-conformance shall automatically render the technology transfer arrangement unenforceable. XPN: Unless said technology transfer arrangement is approved and registered with the Documentation, Information and Technology Transfer Bureau under the provisions of Section 91 on exceptional cases (Sec. 92, IPC).

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National emergency or other circumstances of extreme urgency Where the public interest, in particular, national security, nutrition, health or the development of other vital sectors of the national economy as determined by the appropriate agency of the Government, so requires; at any time after the grant of the patent Where a judicial or administrative body has determined that the manner of exploitation by the owner of the patent or his licensee is anti-competitive at any time after the grant of the patent In case of public non-commercial use of the patent by the patentee, without satisfactory reason at any time after the grant of the patent If the patented invention is not being worked in the Philippines on a commercial scale, although capable of being worked, without satisfactory reason after the expiration of 4 years from the date of filing of the application or 3 years from the date of the patent whichever is later (Sec. 93 in relation to Sec. 94) Where the demand for patented drugs and medicines is not being met to an adequate extent and on reasonable terms, as determined by the Secretary of the Department of Health (Sec. 10, RA 9502).

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW When requirement to obtain a license on reasonable commercial terms not applicable

license, upon proper showing of new facts or circumstances justifying such amendment.

1. Where the petition for compulsory license seeks to remedy a practice determined after judicial or administrative process to be anti-competitive; 2. In situations of national emergency or other circumstances of extreme urgency; 3. In cases of public non-commercial use; and 4. In cases where the demand for the patented drugs and medicines in the Philippines is not being met to an adequate extent and on reasonable terms, as determined by the Secretary of the Department of Health (R.A. 8293, Sec. 95 as amended by R.A. 9502).

Cancellation of complusory license

Terms and condition of a compulsory license

Surrender of compulsory license

1.

The licensee may surrender the license by a written declaration submitted to the Office.

2. 3.

4.

5.

6.

Upon the request of the patentee, the Director may cancel the compulsory license: (a) If the ground for the grant of the compulsory license no longer exists and is unlikely to recur; (b) If the licensee has neither begun to supply the domestic market nor made serious preparation therefor; (c) If the licensee has not complied with the prescribed terms of the license;

The scope and duration of such license shall be limited to the purpose for which it was authorized; The license shall be non-exclusive; The license shall be non-assignable, except with that part of the enterprise or business with which the invention is being exploited; Use of the subject matter of the license shall be devoted predominantly for the supply of the Philippine market: Provided, That this limitation shall not apply where the grant of the license is based on the ground that the patentee's manner of exploiting the patent is determined by judicial or administrative process, to be anti-competitive. The license may be terminated upon proper showing that circumstances which led to its grant have ceased to exist and are unlikely to recur: Provided, That adequate protection shall be afforded to the legitimate interest of the licensee; and The patentee shall be paid adequate remuneration taking into account the economic value of the grant or authorization, except that in cases where the license was granted to remedy a practice which was determined after judicial or administrative process, to be anti-competitive, the need to correct the anti-competitive practice may be taken into account in fixing the amount of remuneration.

NOTE: The said Director shall cause the amendment, surrender, or cancellation in the Register, notify the patentee, and/or the licensee, and cause notice thereof to be published in the IPO Gazette.

Licensee’s exemption from liability Any person who works a patented product, substance and/or process under a license granted under this Chapter, shall be free from any liability for infringement: Provided however, That in the case of voluntary licensing, no collusion with the licensor is proven. This is without prejudice to the right of the rightful owner of the patent to recover from the licensor whatever he may have received as royalties under the license (Sec. 102, IPC). . ASSIGNMENT AND TRANSMISSION OF RIGHTS Forms of assignment 1. Total – assignment of entire right, title or interest in and to the patent and the invention covered thereby. 2. Partial a. Separate rights – assignment of a specific right (ex: right to sell) b. Pro Indiviso – assignment of an aliquot part which results in co-ownership

NOTE: The patent owner receive royalties in losing his property rights because of the compulsory licensing.

Amendment of compulsory license Upon the request of the patentee or the licensee, the Director of Legal Affairs may amend the decision granting the compulsory UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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INTELLECTUAL PROPERTY LAWS Manner of effecting transfer of rights Trademark v. Tradename 1. By inheritance or bequest 2. License contract

TRADEMARK Goods or services offered by a proprietor or enterprise are designated by trademark (goods) or service marks (services).

Effect of an assignment of a patent The assignment works as an estoppel by deed, preventing the assignor from denying the novelty and utility of the patented invention when sued by the assignee for infringement.

Refers to the goods.

Form of an assignment

Acquired only by registration.

1. In writing 2. Acknowledged and certified before a notary public or other officer authorized to perform notarial acts 3. Recorded in the IPO

TRADE NAME A natural or artificial person who does business and produces or performs the goods or services designated by trademark or service mark. Refers to business and its goodwill. Need not be registered.

Collective mark and collective trade-name A "collective mark" is any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods or services of different enterprises (Sec. 121.2, RA 8293).

Effect if the assignment was not recorded in the IPO A deed of assignment affecting title shall be void as against any subsequent purchaser or mortgagee for valuable consideration and without notice unless, it is so recorded in the Office, within three (3) months from the date of said instrument, or prior to the subsequent purchase or mortgage. However, even without recording, the instruments are binding upon the parties.

An application for registration of a collective mark shall designate the mark as a collective mark and shall be accompanied by a copy of the agreement, if any, governing the use of the collective mark. (Sec. 167.2[a])

Maintenance of a suit for infringement by a licensee

Functions of trademark

GR: A licensee may NOT maintain a suit for infringement. Only the patentees, his heirs, assignee, grantee or personal representatives may bring an action for infringement.

1. To point out distinctly the origin or ownership of the articles to which it is affixed. 2. To secure to him who has been instrumental in bringing into market a superior article or merchandise the fruit of his industry and skill 3. To prevent fraud and imposition (Etepha v. Director of Patents, G.R. No. L-20635, Mar. 31, 1966).

XPN: If the licensing agreement provides that the licensee may bring an action for infringement or if he was authorized to do so by the patentee through a special power of attorney.

Salient features of the Paris convention for the protection of industrial property

TRADEMARKS

1. National Treatment Principle– foreign nationals are to be given the same treatment in each of the member countries as that country makes available in its own citizens. 2. Right of Priority –any person who has duly filed registration for trademark shall enjoy a right of priority of 6 months (Rule 203, Trademark Rules) 3. Protection against Unfair Competition 4. Protection of Tradenames –protected in all countries without obligation of filing or registration. 5. Protection of Well-Known Marks

DEFINITION OF MARKS, COLLECTIVE MARKS, TRADE NAMES Trademark Any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise (Sec 121.1, IPC). A trade name is a name or designation identifying or distinguishing an enterprise.

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MERCANTILE LAW 6. Most favored nation treatment - any advantage, favour, privilege or immunity granted by a Member to the nationals of any other country shall be accorded immediately and unconditionally to the nationals of all other Members.

No registration of a mark in the Philippines by a person described in Section 131 shall be granted until such mark has been registered in the country of origin of the applicant. Nothing in the said section shall entitle the owner of a registration granted under this section to sue for acts committed prior to the date on which his mark was registered in this country: Provided, That, notwithstanding the foregoing, the owner of a well-known mark as defined in Section 123.1(e) of this Act, that is not registered in the Philippines, may, against an identical or confusingly similar mark, oppose its registration, or petition the cancellation of its registration or sue for unfair competition, without prejudice to availing himself of other remedies provided for under the law.

ACQUISITION OF OWNERSHIP OF MARK Acquisition of marks Marks are acquired solely through registration (Sec. 122, IPC). NOTE: Registration, without more, does not confer upon the registrant an absolute right to the registered mark. The certificate of registration is merely a prima facie proof that the registrant is the owner of the registered mark or trade name. Evidence of prior and continuous use of the mark or trade name by another can overcome the presumptive ownership of the registrant and may very well entitle the former to be declared owner in an appropriate case.

In like manner and subject to the same conditions and requirements, the right provided in this section may be based upon a subsequent regularly filed application in the same foreign country: Provided, That any foreign application filed prior to such subsequent application has been withdrawn, abandoned, or otherwise disposed of, without having been laid open to public inspection and without leaving any rights outstanding, and has not served, nor thereafter shall serve, as a basis for claiming a right of priority.

Marks which may be registered Any word, name, symbol, emblem, device, figure, sign, phrase, or any combination thereof except those enumerated under Section 123, IPC. Requirements for a mark to be registered

Doctrine of secondary meaning

1. A visible sign (not sounds or scents); and 2. Capable of distinguishing one’s goods and services from another.

This doctrine is to the effect that a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because it is geographical or otherwise descriptive, may nevertheless be used exclusively by one producer with reference to his article so long as 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 (G. and C. Merriam Co. v. Saalfield, 198 F. 369, 373, cited in Ang v. Teodoro, G.R. No. L-48226, Dec. 14, 1942).

Division of application Any application referring to several goods or services, hereafter referred to as the "initial application," may be divided by the applicant into two (2) or more applications, hereafter referred to as the "divisional applications," by distributing among the latter the goods or services referred to in the initial application. The divisional applications shall preserve the filing date of the initial application or the benefit of the right of priority (Sec. 129, IPC).

Q: Is there an infringement of trademark when two similar goods use the same words, “PALE PILSEN”?

Priority right A: None, because “pale pilsen” are generic words descriptive of the color (pale) and of a type of beer (pilsen), which is a light bohemian beer with strong hops flavor that originated in the City of Pilsen in Czechoslovakia. Pilsen is a primarily geographically descriptive word, hence, non-registrable and not appropriable by any beer manufacturer(Asia Brewery, Inc. v. CA, G.R. No. 103543, July 5, 1993).

An application for registration of a mark filed in the Philippines by a person referred to in Section 3, and who previously duly filed an application for registration of the same mark in one of those countries, shall be considered as filed as of the day the application was first filed in the foreign country.

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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INTELLECTUAL PROPERTY LAWS Person who may file an opposition to trademark registration and grounds for filing the same

b. Closely related goods or services, or c. If it nearly resembles such a mark as to be likely to deceive or cause confusion;

Any person who believes that he would be damaged by the registration of a mark may, upon payment of the required fee and within thirty (30) days after the publication referred to in Subsection 133.2, file with the Office an opposition to the application (Sec. 134, IPC).

5.

6.

ACQUISITION AND OWNERSHIP OF TRADE NAME Acquisition of trade names 7. Trade names or business names are acquired through adoption and use. Registration is not required (IPC, Sec. 165). It is the actual use in commerce or business is a pre-requisite to the acquisition of the right of ownership (Shangri-la Hotel Management Ltd. v Developers Group of companies, May 10, 2006 G.R. No. 159938).

8. 9.

Q: Can a previously used trade name of a business in a foreign country bar its appropriation by another in the Philippines?

10.

A: Yes. The IPC does not require that the actual use of a trademark must be within the Philippines. For a person to have ownership of a mark, the mark must not have been already appropriated (i.e., used) by someone else. The Intellectual Property Code (IPC) embodies the firm resolve of the Philippines to observe and follow the Paris Convention (Shangri-la Hotel Management Ltd. v Developers Group of companies, supra).

11.

12. 13.

Is Identical with an internationally well-known mark, whether or not it is registered here, used for identical or similar goods or services Is Identical with an internationally well-known mark which is registered in the Philippines with respect to non-similar goods or services. Provided, that the interests of the owner of the registered mark are likely to be damaged by such use Is likely to Mislead the public as to the nature, quality, characteristics or geographical origin of the goods or services Consists exclusively of signs that are Generic for the goods or services that they seek to identify Consists exclusively of signs that have become Customary or usual to designate the goods or services in everyday language and established trade practice Consists exclusively that may serve in trade to Designate the kind, quality, quantity, intended purpose, value, geographical origin, time or production of the goods or rendering of the services, or other characteristics of the goods or services Consists of Shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that affect their intrinsic value Consists of Color alone, unless defined by a given form; or Is Contrary to public order or morality (Sec. 123, IPC).

NON-REGISTRABLE MARKS Q: Laberge, Inc., manufactures and markets after-shave lotion, shaving cream, and deodorants using the trademark “PRUT”, which is registered with the Intellectual Property Office. Laberge does not manufacture briefs and underwear and these items are not specified in the certificate of registration. JG who manufactures briefs and underwear, wants to know whether, under our laws, he can use and register the trademark “PRUTE” for his merchandise. Can JG register the trademark?

Non-registrable marks (IFNIIIM-GCDS) 1.

2.

3.

4.

Consists of Immoral, deceptive or scandalous matter or falsely suggest a connection with persons, institutions, beliefs, or national symbols Consists of the Flag or coat of arms or other insignia of the Philippines or any of its political subdivisions, or of any foreign nation Consists of a Name, portrait or signature identifying a particular living individual except by his written consent, or the name, signature, or portrait of a deceased President of the Philippines, during the life of his widow except by written consent of the widow Identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in respect of: \a. The same goods or services, or

A: Yes. The trademark registered in the name of Laberge, Inc covers only after-shave lotion, shaving cream, deodorant, talcum powder and toilet soap. It does not cover briefs and underwear. The limit of the trademark is stated in the certificate issued to Laberge Inc. It does not include briefs and underwear which are different products protected by Larberge’s trademark. JG can register the trademark “PRUTE” to

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MERCANTILE LAW cover its briefs and underwear (Faberge Inc v IAC, G.R. No. 71189, November 4, 1992)

purchasers (Sundiang & Aquino 2014 citing Societe Des Produit Nestle S.A v. CA, 356 SCRA 207, 217)

PRIOR USE OF MARK AS A REQUIREMENT

Totality or Holistic test

Prior use of the mark is NOT a requirement for registration

Totality or holistic test Confusing similarity is to be determined on the basis of visual, aural, connotative comparisons and overall impressions engendered by the marks in controversy as they are encountered in the marketplace.

Actual prior use in commerce in the Philippines has been abolished as a condition for the registration of a trademark (RA 8293). Instances when non-use is excused

NOTE: The dominancy test only relies on visual comparisons between two trademarks whereas the totality or holistic test relies not only on the visual but also on the aural and connotative comparisons and overall impressions between the two trademarks (Societe Des Produits Nestl, S.A. v. CA, G.R. No. 112012, Apr. 4, 2001).

1. If caused by circumstances arising independently of the will of the owner. Lack of funds is not an excuse. 2. A use which does not alter its distinctive character though the use is different from the form in which it is registered. 3. Use of mark in connection with one or more of the goods/services belonging to the class in which the mark is registered. 4. The use of a mark by a company related to the applicant/registrant. 5. The use of a mark by a person controlled by the registrant (Section 152, IPC).

Q: N Corporation manufactures rubber shoes under the trademark “Jordann” which hit the Philippine market in 1985, and registered its trademark with the Bureau of Patents, Trademarks and Technology in 1990. PK Company also manufactures rubber shoes with the trademark “Javorski” which it registered with BPTTT in 1978. In 1992, PK Co adopted and copied the design of N Corporation’s “Jordann” rubber shoes, both as to shape and color, but retained the trademark “Javorski” on its products. May PK Company be held liable to N Co? Explain. (1996 Bar Question)

TEST TO DETERMINE CONFUSING SIMILARITY BETWEEN MARKS Test to determine confusing similarity between marks

A: PK Co may be liable for unfairly competing against N Co. By copying the design, shape and color of N Corporation’s “Jordann” rubber shoes and using the same in its rubber shoes trademarked “Javorski,” PK is obviously trying to pass off its shoes for those of N. It is of no moment that the trademark “Javorski” was registered ahead of the trademark “Jordann.”

The tests in determining trademark infringement are the following: 1. Dominancy and 2. Holistic Test Dominancy Test

Priority in registration is not material in an action for unfair competition as distinguished from an action for infringement of trademark. The basis of an action for unfair competition is confusing and misleading similarity in general appearance, not similarity of trademarks. (Converse Rubber Co. v. Jacinto Rubber & Plastics Co., G.R. Nos. 27425, 30505, Apr. 28, 1980)

Dominancy test Focuses on the similarity of the prevalent features of the competing marks. If the competing trademark contains the main or essential or dominant features of another, and confusion is likely to result, infringement takes place (Asia Brewery v. CA, G.R. No. 103543, 5 July 1993).

Q: The “Test of Dominancy” in the Law on Trademarks, is a way to determine whether there exist an infringement of a trademark by --- (2012 MCQ Bar Question)

Duplication or imitation is not necessary; nor is it necessary that the infringing label should suggest an effort to imitate. The question is whether the use of marks involved is likely to cause of confusion or mistake in the mind of the public or deceive

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

A: Focusing on the similarity of the prevalent features of the competing trademarks that might cause confusion (Amador, 2007)

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INTELLECTUAL PROPERTY LAWS Principle of related goods

2. Need not be used or registered in the Philippines 3. Need not be known by the public at large but only by relevant sector of the public.

Goods are related when they: 1. Belong to the same class or have the same descriptive properties; or 2. When they possess the same physical attributes or essential characteristics with reference to their form, composition, texture or quality.

Rules regarding internationally-well known marks GR: Prohibition on subsequent registration does not include services and goods of different nature or kind. XPNs: 1. If the internationally well-known mark is not registered in the Philippines, the application for registration of a subsequent or similar mark can be rejected only if the goods or services specified in the application are similar to those of the internationally well-known mark. 2. If the internationally well-known mark is registered in the Philippines, the application for registration of a psubsequent or similar mark can be refused even if the goods or services specified in the application are not identical or similar to those of the internationally well-known mark.

Rule of idem sonans Two names are said to be "idem sonantes" if the attentive ear finds difficulty in distinguishing them when pronounced (Martin v. State, 541 S.W. 2d 605). Applicability of idem sonans rule Similarity of sound is sufficient to rule that the two marks are confusingly similar when applied to merchandise of the same descriptive properties (Marvex Commercial v. Director of Patent, G.R. No. L-19297, Dec. 22, 1966).

Criteria for well-known brands Types of confusion that arise from the use of similar or colorable imitation marks

1. The duration, extent and geographical area of any use of the mark, in particular, the duration, extent and geographical area of any promotion of the mark, including advertising or publicity and the presentation, at fairs or exhibitions, of the goods and/or services to which the mark applies. 2. The market share, in the Philippines and in other countries, of the goods and/or services to which the mark applies 3. The degree of the inherent or acquired distinction of the mark 4. The quality-image or reputation acquired by the mark 5. The extent to which the mark has been registered in the world 6. The exclusivity of use attained by the mark in the world 7. The commercial value attributed to the mark in the world 8. The record of successful protection of the rights in the mark 9. The outcome of litigations dealing with the issue of whether the mark is a well-known mark 10. The presence of absence of identical or similar marks validly registered for or used on identical or similar goods or services and owned by persons other than the person claiming that his mark is well-known mark. Provided further, that the mark is well-known both internationally and in the Philippines (A.M. No. 10-3-10-SC)

1. Confusion of goods/product confusion - there is confusion of goods when the products are competing 2. Confusion of business/source or origin confusion the products are non-competing but related enough to produce confusion of affiliation (McDonald’s Corp. v. L.C. Big Mak Burger, Inc., G.R. No. 143993, Aug. 18, 2004). Colorable imitation Such a close or ingenious imitation as to be calculated to deceive ordinary persons, or such a resemblance to the original as to deceive an ordinary purchaser giving such attention as a purchaser usually gives, as to cause him to purchase the one supposing it to be the other (Societe des Produits Nestlé, S.A. v. CA, G.R. No. 112012, Apr. 4, 2001). WELL-KNOWN MARKS Internationally well-known mark The following well-known mark

constitutes

internationally

1. Considered by the competent authority of the Philippines to be “well-known” internationally and in the Philippines as the mark of a person other than the applicant or registrant

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MERCANTILE LAW RIGHTS CONFERRED BY REGISTRATION

Rights of a registered mark owner

Certificate of registration prima facie evidence of validity

1. Protection against reproduction, or imitation or unauthorized use of the mark (infringement of mark) 2. To stop entry of imported merchandise into the country containing a mark identical or similar to the registered mark 3. To transfer or license out the mark.

A certificate of registration of a mark shall be prima facie evidence of the validity of the registration, the registrant’s ownership of the mark, and of the registrant’s exclusive right to use the same in connection with the goods or services and those that are related thereto specified in the certificate (Sec. 138, IPC).

USE BY THIRD PARTIES OF NAMES, ETC. SIMILAR TO REGISTERED MARK Effect of use of indications by third parties for purposes other than those for which the mark is used

Issuance and publication of certificate The certificate of registration shall be issued when the period for filing the opposition has expired, or when the Director of Legal Affairs shall have denied the opposition, and upon payment of the required fee (Sec. 136, IPC).

Registration of the mark shall not confer on the registered owner the right to preclude third parties from using bona fide their names, addresses, pseudonyms, a geographical name, or exact indications concerning the kind, quality, quantity, destination, value, place of origin, or time of production or of supply, of their goods or services.

The registered mark shall be published, in the form and within the period fixed by the Regulations. Marks registered at the Office may be inspected free of charge and any person may obtain copies thereof at his own expense. This provision shall also be applicable to transactions recorded in respect of any registered mark (Sec. 138, IPC).

INFRINGEMENT AND REMEDIES Trademark infringement Use without consent of the trademark owner of any reproduction, counterfeit, copy or colorable limitation of any registered mark or trade name. Such use is likely to cause confusion or mistake or to deceive purchasers or others as to the source or origin of such goods or services, or Identity of such business (Esso Standard Eastern v. CA, G.R. No. L-29971, Aug. 31, 1982)

Duration of a certificate of trademark registration A certificate of registration shall remain in force for ten (10) years: Provided, That the registrant shall file a declaration of actual use and evidence to that effect, or shall show valid reasons based on the existence of obstacles to such use, as prescribed by the Regulations, within one (1) year from the fifth anniversary of the date of the registration of the mark. Otherwise, the mark shall be removed from the Register by the Office (Sec, 145, IPC).

Elements to infringement

established

in

trademark

1. That it is duly registered in the Intellectual Property Office 2. The validity of the mark 3. The plaintiff’s ownership of the mark 4. The use of the mark or its colorable imitation by the alleged infringer results in “likelihood of confusion” (McDonald’s Corp v. L.C. Big Mak Burger, Inc., G.R. No. 143993, Aug 18, 2004) 5. Used without the consent of the owner (Prosource International Inc.v. Horphag Research Management SA 605 SCRA 523)

NOTE: The applicant or the registrant shall file a declaration of actual use of the mark with evidence to that effect, as prescribed by the Regulations within three (3) years from the filing date of the application. Otherwise, the application shall be refused or the mark shall be removed from the Register by the Director (Sec. 124.2, IPC).

Renewal of registration A certificate of registration may be renewed for periods of ten (10) years at its expiration. Each request for renewal of registration must be made within 6 months before the expiration of the registration or within 6 months after such expiration on payment of the additional fee prescribed (Sec. 146, IPC). UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

be

Non-competing goods Those which, though they are not in actual competition, are so related to each other that it

314

INTELLECTUAL PROPERTY LAWS might reasonably be assumed that they originate from one manufacturer. Non-competing goods may also be those which, being entirely unrelated, could not reasonably be assumed to have a common source. In the case of related goods, confusion of business could arise out of the use of similar marks; in the latter case of non-related goods, it could not (Esso Standard Eastern, Inc. v. CA, G.R. No. L-29971, Aug. 31, 1982).

3. Administrative—same as in patent infringement cases. If the amount of damages claimed is not less than P200,000.00, the registrant may choose to seek redress against the infringer by filing an administrative action against the infringer with the Bureau of Legal Affairs.

In a later case, in defining trademark infringement, Section 22 of RA 166 deleted the requirement in question and expanded its scope to include such use of the mark or its colorable imitation that is likely to result in confusion on "the source or origin of such goods or services, or identity of such business." Thus, while there is confusion of goods when the products are competing, confusion of business exists when the products are non-competing but related enough to produce confusion of affiliation.

The owner of a trademark which has been infringed is entitled to actual damages: 1. The reasonable profit which the complaining party would have made, had the defendant not infringed his said rights; or 2. The profit which the defendant actually made out of infringement; or 3. The court may award as damages a reasonable percentage based upon the amount of gross sales of the defendant or the value of the services in connection with which the mark or trade name was issued.

Ascertainment of the amount of damages in a civil action for infringement

Modern law recognizes that the protection to which the owner of a trademark is entitled is not limited to guarding his goods or business from actual market competition with identical or similar products of the parties, but extends to all cases in which the use by a junior appropriator of a trade-mark or trade-name is likely to lead to a confusion of source, as where prospective purchasers would be misled into thinking that the complaining party has extended his business into the field or is in any way connected with the activities of the infringer; or when it forestalls the normal potential expansion of his business (Mcdonald’s Corporation v. L & C Big Mak Burger, Inc. August 18, 2004).

NOTE: In cases where actual intent to mislead the public or to defraud the complainant is shown, in the discretion of the court, the damages may be doubled (Sec. 156.3, IPC).

Court which has jurisdiction over violations of intellectual property rights It is properly lodged with the Regional Trial Court even if the penalty therefore is imprisonment of less than six years, or from 2 to 5 years and a fine ranging from P50,000 to P200,000. NOTE: R.A. 8293 and R.A. 166 are special laws conferring jurisdiction over violations of intellectual property rights to the Regional Trial Court. They should therefore prevail over R.A. No. 7691, which is a general law (Samson v. Daway, G.R. No. 160054-55, July 21, 2004).

Remedies of the owner of the trademark against infringers 1. Civil —filed with the Regional Trial Courts. The owner of the registered mark may ask the court to issue a preliminary injunction to quickly prevent infringer from causing damage to his business. Furthermore, the court will require infringer to pay damages to the owner of the mark provided defendant is shown to have had notice of the registration of the mark (which is presumed if a letter R within a circle is appended) and stop him permanently from using the mark. 2. Criminal— the owner of the trademark may ask the court to issue a search warrant and in appropriate cases, remedies available shall also include the seizure, forfeiture and destruction of the infringing goods and of any materials and implements the predominant use of which has been in the commission of the offense.

Limitations on the actions for infringement 1. Right of prior user– registered mark shall be without affect against any person who, in good faith, before filing or priority date, was using the mark for purposes of his business (Sec 159.1, IPC). 2. Relief against publisher– injunction against future printing against an innocent infringer who is engaged solely in the business of printing the mark (Sec. 159.2, IPC). 3. Relief against newspaper – injunction against the presentation of advertising matter in future issues of the newspaper, magazine or in electronic communications in case the infringement complained of is contained in or is part of paid advertisement in such materials (Sec. 159.3, IPC).

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MERCANTILE LAW UNFAIR COMPETITION

another who has identified such services in the mind of the public; 3. Any person who shall make any false statement in the course of trade or who shall commit any other act contrary to good faith of a nature calculated to discredit the goods, business or services of another.(Sec. 168.3, IPC)

Definition Employing deception or any other means contrary to good faith by which a person passes off his goods or business or services for those of one who has already established goodwill thereto (Sec. 168.2, IPC)

The law on unfair competition is broader than the law on trademark infringement

Infringement of trademark v. Unfair competition INFRINGEMENT OF TRADEMARK Unauthorized use of a trademark. Fraudulent intent is unnecessary. GR: Prior registration of the trademark is a prerequisite to the action. XPN: Well-known marks

Trademark infringement is more limited but it recognizes a more exclusive right derived from the trademark adoption and registration by the person whose goods or business is first associated with it. Hence, even if one fails to establish his exclusive property right to a trademark, he may still obtain relief on the ground of his competitor’s unfairness or fraud. Conduct constitutes unfair competition if the effect is to pass off on the public the goods of one man as the goods of another (Mighty Corporation v. E. & J. Gallo Winery, G.R. No. 154342, July 14, 2004).

UNFAIR COMPETITION The passing off of one’s goods as those of another. Fraudulent intent is essential. Registration is not necessary. (Del Monte Corp. v. CA, G.R. No. 78325, Jan. 23, 1990)

Elements of an action for unfair competition 1. Confusing similarity in the general appearance of the goods; and

Right protected under unfair competition

NOTE: The confusing similarity may or may not result from similarity in the marks, but may result from other external factors in the packaging or presentation of the goods.

A person who has identified in the mind of the public the goods he manufactures or deals in, his business or services from those of others, whether or not a registered mark is employed, has a property right in the goodwill of the said goods, business or services so identified, which will be protected in the same manner as other property rights (Sec. 168.1, IPC).

2. Intent to deceive the public and defraud a competitor. NOTE: The intent to deceive and defraud may be inferred from the similarity in appearance of the goods as offered for sale to the public (McDonald’s Corporation v. L.C. Big Mak Burger, Inc., et al., G.R. No. 143993, Aug. 18, 2004).

Persons guilty of unfair competition 1. Any person, who is selling his goods and gives them the general appearance of goods of another manufacturer or dealer, either as to the goods themselves or in the wrapping of the packages in which they are contained, or the devices or words thereon, or in any other feature of their appearance, which would be likely to influence purchasers to believe that the goods offered are those of a manufacturer or dealer, other than the actual manufacturer or dealer, or who otherwise clothes the goods with such appearance as shall deceive the public and defraud another of his legitimate trade, or any subsequent vendor of such goods or any agent of any vendor engaged in selling such goods with a like purpose; 2. Any person who by any artifice, or device, or who employs any other means calculated to induce the false belief that such person is offering the services of UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

The element of passing off In order to prove a case of unfair competition, it is sufficient to show that such deception will be the natural and probable cause of defendants acts. Q: The NBI found that SG Inc. is engaged in the reproduction and distribution of counterfeit "playstation games" and thus applied with the Manila RTC warrants to search respondent's premises in Cavite. RTC granted such warrants and thus, the NBI served the search warrants on the subject premises. SG Inc. questioned the validity of the warrants due to wrong venue since the RTC of Manila had no jurisdiction to issue a search warrant enforceable in Cavite. Is the contention of SG Inc. correct?

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INTELLECTUAL PROPERTY LAWS A: No, unfair competition is a transitory or continuing offense under Section 168 of Republic Act No. 8293. As such, petitioner may apply for a search warrant in any court where any element of the alleged offense was committed, including any of the courts within Metro Manila and may be validly enforced in Cavite (Sony Computer Entertainment Inc. v. Supergreen Inc. G.R. No. 161823, Mar. 22, 2007).

COLLECTIVE MARKS Collective mark A "collective mark" or “collective trade-name" is a mark or trade-name used by the members of a cooperative, an association or other collective group or organization ( Sec. 40, RA 166).

TRADE NAMES OR BUSINESS NAMES

Contents of an application for registration of a collective mark

Trade name or business name 1. The application shall designate the mark as a collective mark 2. Accompanied by a copy of the agreement, if any, governing the use of the collective mark (Sec. 167.2, IPC)

Any individual name or surname, firm name, device nor word used by manufacturers, industrialists, merchants, and others to identify their businesses, vocations or occupants (Converse Rubber Corp. vs. Universal Rubber Products, GR No. L-27425, L-30505, April 28, 1980).

Grounds for the cancellation of collective marks

Limitations on use of trade name or business name

1. The Court shall cancel the registration of a collective mark if the person requesting the cancellation proves that only the registered owner uses the mark, 2. Or that he uses or permits its use in contravention of the agreements referred to in Subsection 166.2, 3. Or that he uses or permits its use in a manner liable to deceive trade circles or the public as to the origin or any other common characteristics of the goods or services concerned (Sec 167.3, IPC).

A person may not: 1. Use a name if the word is generic ( Lyceum of the Philippines v. CA, 219 SCRA 610). 2. Use any name indicating a geographical locations ( Ang Si Heng vs. Wellington Department Store 92 Phil. 448). 3. Use any name or designation contrary to public order or morals 4. Use a name if it is liable to deceive trade circles or the public as to the nature of the enterprise identified by that name ( Sec. 165.1, IPC). 5. Subsequently use a trade name likely to mislead the public as a third party (Sec. 165.2, b, IPC). 6. Copy or simulate the name of any domestic product (for imported products). 7. Copy or simulate a mark registered in accordance with the provisions of IPC (for imported products). 8. Use mark or trade name calculated to induce the public to believe that the article is manufactured in the Philippines, or that it is manufactured in any foreign country or locality other than the country or locality where it is in fact manufactured.

NOTE: The registration of a collective mark, or an application therefor shall not be the subject of a license contract.

Criminal penalties under the Intellectual Property Code for unfair competition, infringement, false designation of origin and false representations A criminal penalty of imprisonment from two (2) years to five (5) years and a fine ranging from Fifty thousand pesos (P50,000) to Two hundred thousand pesos (P200,000), shall be imposed on any person who is found guilty of committing any of the acts. The penalty shall be independent of the civil and administrative sanctions imposed by law (Sec 170, IPC).

NOTE: Items 4, 5 and 6 only applies to imported products and those imported articles shall not be admitted to entry at any customhouse of the Philippines (Sec. 166, IPC).

Cancellation of trademark registration Change in the ownership of a trade name A: A trademark registration may be cancelled by any person who believes that he will be damaged by the registration of the mark: 1. Within 5 years, from the date of the registration of the mark; or 2. At any time;

The change in the ownership of a trade name is made with the transfer of the enterprise or part thereof identified by that name (Sec. 165.4, IPC).

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MERCANTILE LAW a. If the registered mark becomes the generic name for the goods or services, or a portion thereof, for which it is registered; b. If the mark has been abandoned; c. If its registration was obtained fraudulently or contrary to the provisions of the IPC; d. If the registered mark is being used by, or with the permission of, the registrant so as to misrepresent the source of the goods or services on or in connection with which the mark is used; e. Non-use of the mark within the Philippines, without legitimate reason, for an uninterrupted period of 3 years.

Elements of originality 1. It is independently created by the author, and 2. It possesses some minimal degree of creativity Time when copyright vests Works are protected from the time of their creation, irrespective of their mode or form of expression, as well as of their content, quality and purpose. COPYRIGHTABLE WORKS Copyrightable works

NOTE: If in a petition for cancellation of a trademark, it was established that the petitioner was not its owner, prior registration can be cancelled without need of filing a separate petition (E.Y. Industrial Sales, Inc. V Shen Dar Electricity and Machinery Co. Ltd. 634 SCRA 363).

1. Literary and (BOLD-MAN-GAS-PAP-CO)

Artistic

Works

a. Books, pamphlets, articles and other writings b. Lectures, sermons, addresses, dissertations prepared for Oral delivery, whether or not reduced in writing or other material form c. Letters d. Dramatic, choreographic works e. Musical compositions f. Works of Art g. Periodicals and Newspapers h. Works relative to Geography, topography, architecture or science i. Works of Applied art j. Works of a Scientific or technical character k. Photographic works l. Audiovisual works and cinematographic works m. Pictorial illustrations and advertisements n. Computer programs; and o. Other literary, scholarly, scientific and artistic works (Sec. 172.1, IPC).

Transliteration v. Translation of mark Transliteration is an act, process or instances of representing or spelling of words, letters or characters of one language in the letters and characters of another language or alphabet Translation is an act, process or instance of translating as rendering from one language or representational system into another.

COPYRIGHTS Copyright A right over literary and artistic works which are original intellectual creations in the literary and artistic domain protected from the moment of creation (Sec. 171.1, IPC).

2. Derivative Works a. Dramatizations, translations, adaptations, abridgements, arrangements, and other alterations of literary or artistic works; b. Collections of literary, scholarly, or artistic works and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents (Sec. 173, IPC).

BASIC PRINCIPLES Elements of copyright-ability 1. Originality – Must have been created by the author’s own skill, labor, and judgment without directly copying or evasively imitating the work of another (Ching Kian Chuan v. CA, G.R. No. 130360, Aug. 15, 2001). 2. Expression – Must be embodied in a medium sufficiently permanent or stable to permit it to be perceived, reproduced or communicated for a period more than a transitory duration.

NOTE: Derivative works shall be protected as new works, provided that such new work shall not affect the force of any subsisting copyright upon the original works employed or any part thereof, or be construed to imply any right to such use of the original works, or to secure or extend copyright in such original works (Sec. 173.2, IPC).

Q: P&D was granted a copyright on the technical drawings of light boxes as "advertising display UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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INTELLECTUAL PROPERTY LAWS units". SMI, however, manufactured similar or identical to the light box illustrated in the technical drawings copyrighted by P&D for leasing out to different advertisers. Was this an infringement of P&D’s copyright over the technical drawings?

such as the SCRA or SCAD as these already fall under the classification of derivative works, hence copyrightable 6. Any work of the Government of the Philippines GR: Conditions imposed prior the approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office, may, among other things, impose as condition the payment of royalties.

A: No, P&D’s copyright protection extended only to the technical drawings and not to the light box itself. The light box was not a literary or artistic piece which could be copyrighted under the copyright law. If SMI reprinted P&D’s technical drawings for sale to the public without license from P&D, then no doubt they would have been guilty of copyright infringement. Only the expression of an idea is protected by copyright, not the idea itself. If what P&D sought was exclusivity over the light boxes, it should have instead procured a patent over the light boxes itself (Pearl and Dean Inc. v. Shoe Mart Inc., GR No. 148222, Aug. 15, 2003).

XPN: No prior approval or conditions shall be required for the use of any purpose of statutes, rules and regulations, and speeches, lectures, sermons, addresses, and dissertations, pronounced, read, or rendered in courts of justice, before administration agencies, in deliberative assemblies and in meetings of public character (Section 176, IPC).

Q: Juan Xavier wrote and published a story similar to an unpublished copyrighted story of Manoling Santiago. It was, however, conclusively proven that Juan Xavier was not aware that the story of Manoling Santiago was protected by copyright. Manoling Santiago sued Juan Xavier for infringement of copyright. Is Juan Xavier liable? (1998 Bar Question)

7. TV programs, format of TV programs (Joaquin v. Drilon, G.R. No. 108946, Jan. 28, 1999) 8. Systems of bookkeeping; and 9. Statutes. Q: BJ Productions, Inc. (BJPI) is the holder/grantee of a copyright of “Rhoda and Me”, a dating game show aired from 1970 to 1977. Subsequently, however, RPN aired the game show “It’s a Date”, which was produced by IXL Productions, Inc. (IXL). As such, an information for copyright infringement was filed against RPN. The DOJ Secretary directed the prosecutor to dismiss the case for lack of probable cause. Was the decision of the DOJ Secretary correct?

A: Yes. Juan Xavier isliable for infringement of copyright. It is not necessary that Juan Xavier is aware that the story of Manoling Santiago was protected by copyright. The work of Manoling Santiago is protected from the time of its creation (Habana v. Robles, 310 SCRA 511). NOTE: There will still be originality sufficient to warrant copyright protection if “the author, through his skill and effort, has contributed a distinguishable variation from the older works.” In such a case, of course, only those parts which are new are protected by the new copyright. Hence, in such a case, there is no case of infringement. Juan Xavier is no less an “author” because others have preceded him.

A: Yes, the format of a show is not copyrightable. The copyright law enumerates the classes of work entitled to copyright protection. The format or mechanics of a television show is not included in the list of protected works. For this reason, the protection afforded by the law cannot be extended to cover them. Copyright, in the strict sense of the term, is purely a statutory right. It is a new or independent right granted by the statute, and not simply a pre-existing right regulated by the statute. Being a statutory grant, the rights are only such as the statute confers, and may be obtained and enjoyed only with respect to the subjects and by the persons, and on terms and conditions specified in the statute (Joaquin v. Drilon, G.R. No. 108946, Jan. 28, 1999).

NON-COPYRIGHTABLE WORKS Non-copyrightable works (INOD-PGTSS) 1. Idea, procedure, system, method or operation, concept, principle, discovery or mere data as such 2. News of the day and other items of press information 3. Any Official text of a legislative, administrative or legal nature, as well as any official translation thereof 4. Pleadings 5. Decisions of courts and tribunals – this refers to original decisions and not to annotated decisions

Q: Rural is a certified public utility providing telephone service to several communities in Manila. It obtains data for the directory from subscribers, who must provide their names and addresses to

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MERCANTILE LAW obtain telephone service. Feist Publications, Inc., is a publishing company that specializes in area-wide telephone directories covering a much larger geographic range than directories such as Rural's. Feist extracted the listings it needed from Rurals’s directory without its consent. Are directories copyrightable?

b. Carry-out derivative work (dramatization, translation, adaptation, abridgement, arrangement or other transformation of the work) c. First distribution of the original and each copy of the work by sale or other forms of transfer of ownership d. Rental right e. Public display f. Public performance g. Other communications to the public.

A: No, directories are not copyrightable and therefore the use of them does not constitute infringement. The Intellectual Property Code mandates originality as a prerequisite for copyright protection. This requirement necessitates independent creation plus a modicum of creativity. Since facts do not owe their origin to an act of authorship, they are not original, and thus are not copyrightable. A compilation is not copyrightable per se, but is copyrightable only if its facts have been "selected, coordinated, or arranged in such a way that the resulting work as a whole constitutes an original work of authorship." Thus, the statute envisions that some ways of selecting, coordinating, and arranging data are not sufficiently original to trigger copyright protection. Even a compilation that is copyrightable receives only limited protection, for the copyright does not extend to facts contained in the compilation (Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340).

2. Moral rights – For reasons of professionalism and propriety, the author has the right: a. To require that the authorship of the works be attributed to him (attribution right) b. To make any alterations of his work prior to, or to withhold it from publication c. Right to preserve integrity of work, object to any distortion, mutilation or other modification which would be prejudicial to his honor or reputation; and d. To restrain the use of his name with respect to any work not of his own creation or in a distorted version of his work (Sec.193, IPC). 3. Droit de suite (Right to proceeds in subsequent transfers or follow up rights) – This is an inalienable right of the author or his heirs to receive to the extent of 5% of the gross proceeds of the sale or lease of a work of painting or sculpture or of the original manuscript of a writer or composer, subsequent to its first disposition by the author.

RIGHTS OF A COPYRIGHT OWNER Presumption of authorship

Rights which are not covered under a Droit de suite (PEEWS)

The natural person whose name is indicated on a work in the usual manner as the author shall, in the absence of proof to the contrary, presumed to be the author of the work. This is applicable even if the name is a pseudonym, where the pseudonym leaves no doubt as to identity of the author (Sec. 219.1, IPC).

1. Prints 2. Etchings 3. Engravings 4. Works of applied art 5. Similar works wherein the author primarily derives gain from the proceeds of reproductions (Sec. 201, IPC).

The person or body corporate, whose name appears on the audio-visual work in the usual manner shall, in the absence of proof to the contrary, be presumed to be the maker of said work ( Sec. 219.2, IPC).

Q: ABC is the owner of certain musical compositions among which are the songs entitled: "Dahil Sa Iyo", "Sapagkat Ikaw Ay Akin," "Sapagkat Kami Ay Tao Lamang" and "The Nearness Of You.” Soda Fountain Restaurant hired a combo with professional singers to play and sing musical compositions to entertain and amuse customers. They performed the above-mentioned compositions without any license or permission from ABC to play or sing the same. Accordingly, ABC demanded from Soda Fountain payment of the necessary license fee for the playing and singing of aforesaid compositions but the

Note: Copyright protection commences from the time of creation.

Rights of an author 1. Economic rights – The right to carry out, authorize or prevent the following acts: a. Reproduction of the work or substantial portion thereof

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INTELLECTUAL PROPERTY LAWS demand was ignored. ABC filed an infringement case against Soda Fountain. Does the playing and singing of musical compositions inside an establishment constitute public performance for profit?

to enjoy the above-mentioned moral rights (Amador, 2007).

A: Yes. The patrons of the Soda Fountain pay only for the food and drinks and apparently not for listening to the music, but the music provided is for the purpose of entertaining and amusing the customers in order to make the establishment more attractive and desirable. For the playing and singing the musical compositions involved, the combo was paid as independent contractors by Soda Fountain. It is therefore obvious that the expenses entailed thereby are added to the overhead of the restaurant which are either eventually charged in the price of the food and drinks or to the overall total of additional income produced by the bigger volume of business which the entertainment was programmed to attract. Consequently, it is beyond question that the playing and singing of the combo in defendant-appellee's restaurant constituted performance for profit (FILSCAP v. Tan, G.R., No. L-36402, Mar. 16, 1987).

The right of an author under Section 193.1. shall last during the lifetime of the author and in perpetuity after his death while the rights under Sections 193.2. 193.3. and 193.4. shall be coterminous with the economic rights, the moral rights shall not be assignable or subject to license (Sec. 193, IPC as amended by R.A. No. 10372).

Term of moral rights

NOTE: The person or persons to be charged with the posthumous enforcement of these rights shall be named in a written instrument which shall be filed with the National Library. In default of such person or persons, such enforcement shall devolve upon either the author’s heirs, and in default of the heirs, the Director of the National Library.

Exceptions to moral rights 1. Absent any special contract at the time creator licenses/permits another to use his work, the following are deemed not to contravene creator’s moral rights, provided they are done in accordance with reasonable customary standards or requisites of the medium: a. Editing b. Arranging c. Adaptation d. Dramatization e. Mechanical and electric reproduction

An author cannot be compelled to perform his contract An author cannot be compelled to perform his contract to create a work or for the publication of his work already in existence. However, he may be held liable for damages for breach of such contract (Sec. 195, IPC). Q: X, an amateur astronomer, stumbled upon what appeared to be a massive volcanic eruption in Jupiter while peering at the planet through his telescope. The following week, X, without notes, presented a lecture on his findings before the Association of Astronomers of the Philippines. To his dismay, he later read an article in a science journal written by Y, a professional astronomer, repeating exactly what X discovered without any attribution to him. Has Y infringed on X's copyright, if any? (2011 Bar Question)

2. Complete destruction of work unconditionally transferred by creators (Sec. 197, IPC). Waiver of moral rights GR: Moral rights can be waived in writing, expressly so stating such waiver. XPN: Even in writing, waiver is not valid if: 1. Use the name of the author, title of his work, or his reputation with respect to any version/adaptation of his work, which because of alterations, substantially tend to injure literary/artistic reputation of another author 2. Use name of author in a work that he did not create

A: No, since no protection extends to any discovery, even if expressed, explained, illustrated, or embodied in a work. Nature of moral rights These are personal rights independent from the economic rights. Being a personal right, it can only be given to a natural person. Hence, even if he has licensed or assigned his economic rights, he continues

Neighboring rights These are the rights of performers, producers of sound recording and broadcasting organizations.

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MERCANTILE LAW Scope of a performer’s rights

communication or broadcast in every communication to the public or broadcast of a performance subsequent to the first communication or broadcast, unless otherwise provided in the contract (Sec. 206, IPC).

Performers shall enjoy the following exclusive rights: 1. As regards their performances, the right of authorizing: a. The broadcasting and other communication to the public of their performance; and b. The fixation of their unfixed performance. 2. The right of authorizing the direct or indirect reproduction of their performances fixed in sound recordings or audiovisual works or fixations in any manner or form; 3. The right of authorizing the first public distribution of the original and copies of their performance fixed in sound recordings or audiovisual works or fixations through sale or rental of other forms of transfer of ownership; 4. The right of authorizing the commercial rental to the public of the original and copies of their performances fixed in sound recordings or audiovisual works or fixations, even after distribution of them by, or pursuant to the authorization by the performer; and 5. The right of authorizing the making available to the public of their performances fixed in sound recordings or audiovisual works or fixations, by wire or wireless means, in such a way that members of the public may access them from a place and time individually chosen by them. (Sec. 203, IPC as amended by R.A. No. 10372).

Scope of the rights of producers on sound recordings Producers of sound recordings shall enjoy the following exclusive rights: 1. The right to authorize the direct or indirect reproduction of their sound recordings, in any manner or form; the placing of these reproductions in the market and the right of rental or lending 2. The right to authorize the first public distribution of the original and copies of their sound recordings through sale or rental or other forms of transferring ownership; 3. The right to authorize the commercial rental to the public of the original and copies of their sound recordings, even after distribution by them by or pursuant to authorization by the producer; and 4. The right to authorize the making available to the public of their sound recordings in such a way that members of the public may access the sound recording from a place and at a time individually chosen or selected by them, as well as other transmissions of a sound recording with like effect (Sec. 208, IPC, as amended by R.A. No. 10372). NOTE: Fair use and limitations to copyrights shall apply mutatis mutandis to performers (Sec. 210, IPC).

Moral rights of performers

Scope of the rights of broadcasting organizations

The performer, shall, as regards his live aural performances or performances fixed in sound recordings, have the right to claim to be identified as the performer of his performances, except where the omission is dictated by the manner of the use of the performance, and to object to any distortion, mutilation or other modification of his performances that would be prejudicial to his reputation.

Broadcasting organizations shall enjoy the exclusive right to carry out, authorize or prevent any of the following acts: 1. The rebroadcasting of their broadcasts 2. The recording in any manner, including the making of films or the use of video tape, of their broadcasts for the purpose of communication to the public of television broadcasts of the same 3. The use of such records for fresh transmissions or for fresh recording (Sec. 211, IPC).

Loss of performer’s rights Once a performer has authorized broadcasting or fixation of his performance (Sec 205, IPC).

Applicability of rights

NOTE: Fair use and limitations to copyrights shall apply mutatis mutandis to performers (Ibid.).

Additional remuneration communications or broadcasts

for

The provisions of Chapter VIII shall apply mutatis mutandis to the rights of performers, producers of sound recordings and broadcasting organizations: 1. Exclusive use of a natural person for own personal purposes 2. Short excerpts for reporting current events 3. Sole use for the purpose of teaching or for scientific research

subsequent

The performer shall be entitled to an additional remuneration equivalent to at least 5% of the original compensation he received for the first UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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INTELLECTUAL PROPERTY LAWS 4. Fair use of the broadcast (Sec. 212, IPC, as amended by R.A. No. 10372).

b. Sound recordings that were first published in the Philippines (Sec. 223, IPC).

Term of protection given to performers, producers and broadcasting organizations

4. For broadcast a. Broadcasts of broadcasting organizations the headquarters of which are situated in the Philippines; and b. Broadcasts transmitted from transmitters situated in the Philippines (Sec. 224, IPC)

1. For performances not incorporated in recordings, 50 years from the end of the year in which the performance took place; and 2. For sound or image and sound recordings and for performances incorporated therein, 50 years from the end of the year in which the recording took place. 3. In case of broadcasts, the term shall be 20 years from the date the broadcast took place. The extended term shall be applied only to old works with subsisting protection under the prior law (Sec. 215, IPC).

NOTE: The provisions of IPC shall also apply to works, performers, producers of sound recordings and broadcasting organizations that are to be protected by virtue of and in accordance with any international convention or other international agreement to which the Philippines is a party (Sec. 221.2 and 224.2, IPC).

Persons whom the rights are granted (copyrightable works applicable) A: 1. For literary and artistic works and derivative works a. Works of authors who are nationals of, or have their habitual residence in, the Philippines; b. Audio-visual works the producer of which has his headquarters or habitual residence in the Philippines; c. Works of architecture erected in the Philippines or other artistic works incorporated in a building or other structure located in the Philippines; d. Works first published in the Philippines; and e. Works first published in another country but also published in the Philippines within thirty days, irrespective of the nationality or residence of the authors (Sec. 221, IPC). 2. For performers a. Performers who are nationals of the Philippines; b. Performers who are not nationals of the Philippines but whose performances: i. Take place in the Philippines; or ii. Are incorporated in sound recordings that are protected under IPC; or iii. Which has not been fixed in sound recording but are carried by broadcast qualifying for protection under IPC (Sec. 222, IPC) 3. Of sound recordings a. Sound recordings the producers of which are nationals of the Philippines; and

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MERCANTILE LAW RULES ON OWNERSHIP OF COPYRIGHT Rules on copyright ownership TYPE OF WORK ORIGINAL LITERARY AND ARTISTIC WORKS JOINT AUTHORSHIP

OWNER Author (Sec. 178.1, IPC) Co-authors – in case of works of joint authorship; in the absence of agreement, their rights shall be governed by the rules on co-ownership. NOTE: If work of joint authorship consists of parts that can be used separately, then the author of each part shall be the original owner of the copyright in the part that he has created (Sec. 178.2, IPC).

AUDIOVISUAL WORK

GR: Producer, the author of the scenario, the composer of the music, the film director, and the author of the work so adapted XPN:The producers shall exercise the copyright to an extent required for the exhibition of the work in any manner (Sec. 178.5, IPC).

ANONYMOUS AND PSEUDONYMOUS WORKS

GR: Publishers – deemed representatives of the author in case of anonymous and pseudonymous works. XPN: When the contrary appears or where the pseudonym or adopted name leaves no doubt as to the author’s identity; or author discloses his identity.

COMMISSIONED WORK

The person who commissioned the work shall own the work but the copyright thereto shall remain with the creator, unless there is a written stipulation to the contrary (Sec. 178.4, IPC).

COLLECTIVE WORKS

Contributor is deemed to have waived his right unless he expressly reserves it (Sec. 196, IPC).

IN THE COURSE OF EMPLOYMENT

GR: The employee, if not a part of his regular duties even if the employee uses the time, facilities and materials of the employer (Sec. 178.3, IPC). XPN: The employer, if the work is the result of the performance of his regularly-assigned duties, unless there is an agreement, express or implied, to the contrary.

LETTERS

Writer –provisions of Article 723, Civil Code govern [ownership shall pertain to the person to whom they are addressed and delivered] (Sec. 178.6, IPC).

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INTELLECTUAL PROPERTY LAWS Collective work v. Joint work. COLLECTIVE WORK Elements remain unintegrated and disparate. Work created by 2 or more persons at the initiative and under the direction of another with the understanding that it will be disclosed by the latter under his own name and that of the contributions of natural persons will NOT be identified

2. The Making of quotations from a published work if they are compatible with fair use and only to the extent justified for the purpose. 3. Communication to the public by mass media of articles on current political, social, economic, scientific or religious topic, lectures, addresses and other works of the same nature 4. As Part of reports of current events (e.g. music played or tunes on the occasion of a sporting event and such tunes were picked up during a new coverage of the event). 5. For Teaching purposes, provided that the source and of the name of the author, if appearing in the work, are mentioned. 6. Recording made in Educational institutions of a work included in a broadcast for the use of such educational institutions, provided that such recording must be deleted within a reasonable period after they were first broadcast. 7. The making of Ephemeral recordings by a broadcasting organization by means of its own facilities and for use in its own broadcast. 8. The Use made of a work by or under the direction or control of the government, by the National Library or by educational, scientific or professional institutions where such use is in the public interest and is compatible with fair use. 9. The Public performance of a work, in a place where no admission fee is charged. 10. Public Display of the original or a copy of the work not made by means of a film, slide, television image or otherwise on screen or by means of any other device or process (e.g. Public display using posters mounted on walls and display boards. 11. Any use made of a work for the purpose of any Judicial proceedings or for the giving of professional advice by a legal practitioner.

JOINT WORK Separate elements merge into a unified whole.

Work prepared by 2 or more authors with the intention that their contributions be merged into inseparable or independent parts of the unitary whole.

Each author shall enjoy copyright to his own contribution

Joint authors shall be co-owners. Co-ownership shall apply.

The work will be attributed to the person under whose initiative and direction it was created unless the contributor expressly reserves his right.

Joint authors shall be both entitled to the acknowledgment as authors of the work.

Q: T, an associate attorney in XYZ Law Office, wrote a newspaper publisher a letter disputing a columnist’s claim about an incident in the attorney’s family. T used the law firm’s letterhead and its computer in preparing the letter. T also requested the firm’s messenger to deliver the letter to the publisher. Who owns the copyright to the letter? (2011 Bar Question)

NOTE: R.A. No. 10372 amended R.A. No. 8293, Sec. 184.1 (1), which now states: the reproduction or distribution of published articles or materials in a specialized format exclusively for the use of the blind, visually- and reading-impaired persons: Provided, That such copies and distribution shall be made on a nonprofit basis and shall indicate the copyright owner and the date of the original publication.

A: T, since he is the original creator of the contents of the letter. LIMITATIONS ON COPYRIGHT General limitations on copyright

Principle of automatic protection The following acts shall not constitute infringement of copyright: (PeMaCoP-TEEUP-DJ)

Works are protected by the sole fact of their creation irrespective of their content, quality or purpose. Such rights are conferred from the moment of creation.

1. Performance of a work, once it has been lawfully made accessible to the public, if done privately and free of charge or for a charitable or religious institution or society.

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MERCANTILE LAW Decompilation may be considered fair use

the work, as may be necessary for such institutions to fulfill their mandate, by reprographic reproduction: a. Where the work by reason of its fragile character or rarity cannot be lent to user in its original form; b. Where the works are isolated articles contained in composite works or brief portions of other published works and the reproduction is necessary to supply them, when this is considered expedient, to persons requesting their loan for purposes of research or study instead of lending the volumes or booklets which contain them; and c. Where the making of such limited copies is in order to preserve and, if necessary in the event that it is lost, destroyed or rendered unusable, replace a copy, or to replace, in the permanent collection of another similar library or archive, a copy which has been lost, destroyed or rendered unusable and copies are not available with the publisher.

Decompilation, which is the reproduction of the code and translation of the forms of the computer program to achieve the inter-operability of an independently created computer program with other programs, may also constitute fair use Other limitations on copyright 1. The fair use of a copyrighted work for criticism, comment, news reporting, teaching including limited number of copies for classroom use, scholarship, research, and similar purposes is not an infringement of copyright. Decompilation, which is understood here to be the reproduction of the code and translation of the forms of a computer program to achieve the interoperability of an independently created computer program with other programs may also constitute fair use under the criteria established by this section, to the extent that such decompilation is done for the purpose of obtaining the information necessary to achieve such interoperability. (Sec. 185, IPC, as amended by R.A. No. 10372). 2. Copyright in a work of architecture shall include the right to control the erection of any building which reproduces the whole or a substantial part of the work either in its original form or in any form recognizably derived from the original, provided, that the copyright in any such work shall not include the right to control the reconstruction or rehabilitation in the same style as the original of a building to which that copyright relates (Sec. 186, IPC). 3. The private reproduction of a published work in a single copy, where the reproduction is made by a natural person exclusively for research and private study, shall be permitted, without the authorization of the owner of copyright in the work but shall not extend to the reproduction of: a. A work of architecture in the form of building or other construction; b. An entire book, or a substantial part thereof, or of a musical work in graphic form by reprographic means; c. A compilation of data and other materials; d. A computer program except as provided in Section 189; and e. Any work in cases where reproduction would unreasonably conflict with a normal exploitation of the work or would otherwise unreasonably prejudice the legitimate interests of the author (Sec. 187, IPC).

But it shall not be permissible to produce a volume of a work published in several volumes or to produce missing tomes or pages of magazines or similar works, unless the volume, tome or part is out of stock (Sec. 188, IPC, as amended by R.A. No. 10372). 5. The reproduction in one back-up copy or adaptation of a computer program shall be permitted, without the authorization of the author of, or other owner of copyright in, a computer program, by the lawful owner of that computer program, provided, the copy or adaptation is necessary for: a. The use of the computer program in conjunction with a computer for the purpose, and to the extent, for which the computer program has been obtained; and b. Archival purposes, and, for the replacement of the lawfully owned copy of the computer program in the event that the lawfully obtained copy of the computer program is lost, destroyed or rendered unusable (Sec. 187, IPC). **R.A. No. 10372 deleted in entirety No. 6.

4. Any library or archive whose activities are not for profit may, without the authorization of the author or copyright owner, make a limited number of copies of UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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INTELLECTUAL PROPERTY LAWS Term of protection of copyright DOCTRINE OF FAIR USE TYPE OF WORK

DURATION

Single creation

Lifetime of the creator and in perpetuity after his death

Joint creation

Anonymous or pseudonymous work

Work of an applied art of an artistic creation with utilitarian functions or incorporated in a useful article whether made by hand or produced on an industrial scale Audio-visual works including those produced by process analogous to photography or any process for making audio-visual recordings Newspaper Article

Doctrine of fair use “Fair use” permits a secondary use that “serves the copyright objective of stimulating productive thought and public instruction without excessively diminishing the incentives for creativity”.

Lifetime of the last surviving co-creator and in perpetuity after his death 50 years after the date of their first publication; except where before the expiration of said period, the author’s identity is revealed or is no longer in doubt, the 1st two mentioned rules shall apply; or if unpublished, 50 years from their making.

Factors that should be considered in order to determine fair use 1. The purpose and character of the use, including whether such use is of a commercial nature or is for non-profit educational purpose; 2. The nature of the copyrighted work; 3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and 4. The effect of the use upon the potential market for or value of the copyrighted work. NOTE: The fact that a work is unpublished shall not by itself bar a finding of fair use if such finding is made upon consideration of all the above factors (Sec. 182.2, IPC). If you copy to the extent that you reduce the marketability of the book, it is no longer fair use. (Lecture- Robeniol)

25 years from the time of the making.

Must carry rule Must-carry rule is another limitation on copyright. It obligates operators to carry the signals of local channels within their respective systems. This is to give the people wider access to more sources of news, information, education, sports event and entertainment programs other than those provided for by mass media and afforded television programs to attain a well informed, well-versed and culturally refined citizenry and enhance their socio-economic growth (ABS-CBN Broadcasting Corporation v. Philippine Multimedia System, G.R. No. 175769-70, Jan. 19, 2009).

50 years from date of publication and, if unpublished, from the date of making

Published works Lifetime of the author and in perpetuity after his death. (Sec. 213, IPC)

Those works which, with the consent of the authors, are made available to the public by wire or wireless means in such a way that members of the public may access these works from a place and time individually chosen by them: provided, that availability of such copies has been such, as to satisfy the reasonable requirement of the public, having regard to the nature of the work. (Sec. 171.7, IPC)

NOTE: The term of protection shall be counted from the 1st day of January of the year following the last publication (Sec. 214, IPC).

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MERCANTILE LAW Public performance v. Communication to the public of a performance PUBLIC PERFORMANCE

NOTE: If two or more persons jointly own a copyright or any part thereof, neither of the owners shall be entitled to grant licenses without the prior written consent of the other owner or owners (Ibid.).

COMMUNICATIONS TO THE PUBLIC OF A PERFORMANCE

Performance at a place or at places where persons outside the normal circle of a family and that family’s closest social acquaintances are or can be present.

The transmission to the public, by any medium, otherwise than by broadcasting, of sounds of a performance or the representations of sounds fixed in a sound recording.

It is performed at a specific time and place. (e.g. The Pacquiao-Clottey Match in Dallas Texas Stadium)

The communication can be accessed through wired or wireless means at a time and place convenient to the viewer (e.g. The Pacquiao-Clottey Match watched via YouTube)

COPYRIGHT INFRINGEMENT Copyright infringement It is the doing by any person, without the consent of the owner of the copyright, of anything the sole right to do which is conferred by statute on the owner of the copyright. The act of lifting from another’s book substantial portions of discussions and examples and the failure to acknowledge the same is an infringement of copyright (Habana v. Robles, G.R. No. 131522, July 19, 1999). Infringement A person infringes a right protected under this Act when one: (a) Directly commits an infringement; (b) Benefits from the infringing activity of another person who commits an infringement if the person benefiting has been given notice of the infringing activity and has the right and ability to control the activities of the other person; (c) With knowledge of infringing activity, induces, causes or materially contributes to the infringing conduct of another (Sec. 216, IPC, as amended by R.A. No. 10372).

Transfer or assignment of copyright The copyright may be assigned or licensed in whole or in part. Within the scope of the assignment or license, the assignee or licensee is entitled to all the rights and remedies which the assignor or licensor had with respect to the copyright (Sec. 180.1, IPC, as amended by R.A. No. 10372). Requisites for a transfer of copyright to take effect 1. If inter vivos, there must be a written indication of such intention; and 2. Filed in National Library upon payment of prescribed fees (Sec. 182, IPC).

Meaning of substantial reproduction It is not necessarily required that the entire copyrighted work, or even a large portion of it, be copied. If so much is taken that the value of the original work is substantially diminished, there is an infringement of copyright and to an injurious extent, the work is appropriated. It is no defense that the pirate did not know whether or not he was infringing any copyright; he at least knew that what he was copying was not his, and he copied at his peril. In cases of infringement, copying alone is not what is prohibited. The copying must produce an “injurious effect” (Habana v. Robles, G.R. No. 131522, July 19, 1999).

The filing of the assignment or license of copyright is NOT a mandatory requirement Section 182 uses the permissive word “may” in reference to the filing of the deed of assignment or transfer of copyright, this filing should not be understood as mandatory for validity and enforceability. The filing is entirely optional for the parties and may be useful only for evidentiary and notification purposes (Amador, 2007). Limitation regarding submission of a literary, photographic or artistic work to a newspaper, magazine or periodical for publication

Plagiarism It is the practice of claiming or implying original authorship of (or incorporating material from) someone else’s written or creative work, in whole or

Unless a greater right is expressly granted, such submission shall constitute only a license to make a single publication (Sec. 180.3, IPC). UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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INTELLECTUAL PROPERTY LAWS in part, into one’s acknowledgment.

own

without

adequate

3. Impounding during the pendency of the action sales invoices and other documents evidencing sales 4. Destruction without any compensation all infringing copies 5. Moral and Exemplary damages (Sec. 216.1); or 6. Seizure and impounding of any article, which may serve as evidence in the court proceedings. (Sec. 216.2, IPC)

Copyright infringement v. Plagiarism COPYRIGHT INFRINGEMENT The unauthorized use of copyrighted material in a manner that violates one of the copyright owner’s exclusive rights, such as the right to reproduce or perform the copyrighted work, or to make derivative works that build upon it. Copyright infringement is a very broad term that describes a variety of acts. It may be duplication of a work, rewriting a piece, performing a written work or doing anything that is normally considered to be the exclusive right of the copyright holder. There is no copyright infringement on public documents. In copyright infringement, the copying must be substantial In copyright infringement, the copying must refer to the expression of an idea.

Remedies (IDID-MS)

in

case

PLAGIARISM

The use of another’s information, language, or writing, when done without proper acknowledgment of the original source.

Double damages The amount of damages to be awarded shall be doubled against any person who: (i) Circumvents effective technological measures; or (ii) Having reasonable grounds to know that it will induce, enable, facilitate or conceal the infringement, remove or alter any electronic rights management information from a copy of a work, sound recording, or fixation of a performance, or distribute, import for distribution, broadcast, or communicate to the public works or copies of works without authority, knowing that electronic rights management information has been removed or altered without authority (Sec. 216.1, IPC, as amended by R.A. No. 10372).

Plagiarism is specific as it refers only to using someone else’s work without proper acknowledgement.

NOTE: The copyright owner may elect, at any time before final judgment is rendered, to recover instead of actual damages and profits, an award of statutory damages for all infringements involved in an action in a sum equivalent to the filing fee of the infringement action but not less than Fifty thousand pesos (Php50,000.00). (Sec. 216.1, IPC, as amended by R.A. No. 10372) Factors to be considered by the court in awarding statutory damages

Public documents can be plagiarized so long as it is not acknowledged.

(1) the nature and purpose of the infringing act; (2) the flagrancy of the infringement; (3) Whether the defendant acted in bad faith; (4) the need for deterrence; (5) Any loss that the plaintiff has suffered or is likely to suffer by reason of the infringement; and (6) Any benefit shown to have accrued to the defendant by reason of the infringement

In plagiarism the copying need not be substantial Plagiarism, may exist even if none of the same words are used to express an idea.

of

copyright

Copying is demonstrated by: 1. Direct Evidence 2. By circumstantial evidence of access and substantial inquiry (most common test) (Amador, 2007)

infringement

1. Injunction 2. Damages, including legal costs and other expenses, as he may have incurred due to the infringement as well as the profits the infringer may have made due to such infringement

NOTE: ACCESS- having reasonable opportunity to view or hear the plaintiff’s work. THRESHOLD INQUIRY: whether there is reasonable opportunity to copy

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MERCANTILE LAW Criminal penalties in case of copyright infringement

Q: Due to the amendment of the IP Code under RA 10372 APPROVED ON FEBRUARY 28, 2013, deleting the provision entitling importation in the Philippines of up to three (3) copies of copyrighted works in a personal baggage, can one still be allowed to import books, DVDs, and CDs from abroad?

1. Imprisonment of one (1) year to three (3) years plus a fine ranging from Fifty thousand pesos (P50,000) to One hundred fifty thousand pesos (P150,000) for the first offense. 2. Imprisonment of three (3) years and one (1) day to six (6) years plus a fine ranging from One hundred fifty thousand pesos to Five hundred thousand (P500,000) for the second offense. 3. Imprisonment of six (6) years and one day to nine (9) years plus a fine ranging from Five hundred thousand pesos (P500,000) to P1,500,000 for the third offense. 4. In all cases, subsidiary imprisonment in cases of insolvency.

A: Yes. In fact, the amendments to the Intellectual Property Code have removed the original limitation of three copies when bringing legitimately acquired copies of copyrighted material into the country. Only the importation of pirated or infringed material is illegal. As long as they were legally purchased, you can bring as many copies you want, subject to Customs regulations (pcdspo.gov.ph). Reproduction of copyrighted material for personal purposes is not punishable by RA 10372

Determination of penalty

Infringement in this context refers to the economic rights of the copyright owner. Transferring music from a lawfully acquired CD into a computer, then downloading it to a portable device for personal use, is not infringement. But if, multiple copies of the CD were reproduced for sale, then infringement occurs (Ibid).

In determining the number of years of imprisonment and the amount of fine, the court shall consider the value of the infringing materials that the defendant has produced or manufactured and the damage that the copyright owner has suffered by reason of the infringement: Provided, That the respective maximum penalty stated in Section 217.1. (a), (b) and (c) herein for the first, second, third and subsequent offense, shall be imposed when the infringement is committed by: (a) the circumvention of effective technological measures; (b) the removal or alteration of any electronic rights management information from a copy of a work, sound recording, or fixation of a performance, by a person, knowingly and without authority; or (c) the distribution, importation for distribution, broadcast, or communication to the public of works or copies of works, by a person without authority, knowing that electronic rights management information has been removed or altered without authority. (Sec. 217.2, IPC, as amended by R.A. No. 10372).

Possession of a music file procured through an infringing activity is a violation of the law The possession of a music file procured through an infringing activity is a violation of the law only if it can be proven that the person benefitting from the music file has knowledge of the infringement, and the power and ability to control the person committing the infringement (Ibid). Jailbreaking or rooting a phone or device Jailbreaking or rooting by themselves are not illegal. However, downloading pirated material, or committing infringement with a “jailbroken” phone increases the penalty and damages imposed on the person found guilty of infringement (Ibid). NOTE: Jailbreaking (for iOS) and rooting (for Android) are examples of decompilation, the process of removing the vendor-imposed limitations of tablets, mobile devices and other electronic gadgets. Though not illegal, decompilation may be in violation of your operating system’s terms of use, and therefore may void your warranty (Ibid).

Affidavit evidence An affidavit made before the notary public in actions for infringement, reciting the facts required to be stated under the IPC (Sec. 216.1).

Liability of mall owners for the infringement activities of their tenants

NOTE: As a prima facie proof, the affidavit shifts the burden of proof to the defendant, to prove the ownership of the copyrighted work.

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

Mall owners are not automatically penalized for the infringing acts of their tenants. When a mall owner or

330

INTELLECTUAL PROPERTY LAWS lessor finds out about an infringement activity, he or she must give notice to the tenant, then he or she will be afforded time to act upon this knowledge. The law requires that one must have both proven knowledge of the infringement, and the ability to control the activities of the infringing person, to be held liable. The mall owner must also have benefitted from the infringement (Ibid).

4. Clarification of the concept of copyright infringement, including secondary liability (Secs. 22 and 23) The provisions on copyright infringement have been refined to include contributory infringement (secondary liability), circumvention of technological measures and rights management information as aggravating circumstances, and the option to collect statutory damages instead of actual damages. However, under Sec. 22 of the amendments, to be secondarily liable, a landlord or mall must: (1) benefit from the infringing activity; (2) must have been given notice of the infringing activity and a grace period to act on the same; and (3) has the right and ability to control the activities of the person who is doing the infringement. The complainant has the burden of proof to provide evidence that all 3 elements are present. If a landlord or mall owner is not aware of the infringement, he cannot be liable for infringement, even if he benefits from it (from rental payments) or has control over the premises.

Other beneficial provisions brought by RA 10372 1. Grant of enforcement powers to IPOPHL (Sec. 2) The law grants visitorial powers to IPOPHL and allows it to undertake enforcement functions with the support of concerned agencies such as PNP, NBI, BOC, OMB and LGUs. IPOPHL itself will not be conducting raids or seizures but will be coordinating with the said agencies. However, as IP rights remain to be private rights, there must be a complaint from the IP right owner. So, if an author sees pirated copies of his book in a certain store, he may notify IPOPHL. IPOPHL can now initiate together with any of the said agencies to address the problem.

5. Fair use for the reading-impaired (Sec. 11)

2. Establishment of the Bureau of Copyright and other related rights (Secs. 1 and 3)

blind,

visually-

and

This provision would give a special fair use exemption for the non-commercial reproduction of works for use by visually-impaired persons. Before this amendment, hundreds of thousands of blind Filipinos could not buy Braille works at cheap prices because copyright protection operates. Now with this amendment, blind and visually impaired Filipinos can have easier access to copyrighted works in Braille.

At present there is no entity performing the more substantial function of policy formulation, rule making, adjudication, research and education, which is envisioned to be handled by the Bureau of Copyright. Although a Copyright Division exists in the National Library, the function of such office is merely to accept deposits of copyrighted works. The Copyright Bureau is dedicated to serving the needs of the copyright-based industries and stakeholders could give more focus and rally more resources and support for the creative industry, which is very important for protection of works by Filipinos both here and abroad.

6. Formulation of IP Policies within universities and colleges (Sec. 27) This will ensure that the rights of the academic community (professors, researchers, students) over their literary, scholarly and artistic works are clearly delineated and respected. With an IP Policy in existence, these sectors within the academe will have a clear delineation of their respective rights and benefits, thus, avoiding disputes and costly litigation within their ranks which would be detrimental to education, research and development.

3. Accreditation of collective management organizations or CMOs (Sec. 10) CMOs are organizations that enforce the copyright of the copyright holders. Through this mandate, IPOPHL will be able to monitor and promote good corporate governance among CMOs, benefitting not only the rights holders themselves but also the users of copyrighted works. Members of the Philippine Retailers Association (PRA), mall owners, restaurants, and other heavy users of music in their establishments will greatly benefit from this provision, as they are ensured that only legitimate collecting agencies can collect royalties from them on behalf of copyright owners.

(http://www.ipophil.gov.ph/index.php/20-what-s-ne w/135-fact-sheet-on-ip-code-amendments)

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MERCANTILE LAW RULES OF PROCEDURE FOR INTELLECTUAL PROPERTY RIGHTS CASES (A.M. No. 10-3-10-SC) In what courts applicable Regional Trial Courts designated by the Supreme Court as Special Commercial Courts Effect of registration and deposit Registration and deposit of a work with the National Library or the Intellectual Property Office shall not carry with it the presumption of ownership of the copyright by the registrant or depositor, nor shall it be considered a condition sine qua non to a claim of copyright infringement

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

332

INTELLECTUAL PROPERTY LAWS SPECIAL LAWS ANTI-MONEY LAUNDERING ACT OF 2001 (R.A. 9160 ,AS AMENDED BY RA 9194, 10167, 10365) POLICY OF THE LAW Policy of the State 1. To protect and preserve the integrity and confidentiality of bank accounts and to ensure that the Philippines shall not be used as a money laundering site for the proceeds of any unlawful activity. 2. To pursue the State’s foreign policy to extend cooperation in transnational investigation and prosecutions of persons involved in money laundering activities wherever committed. (Sec. 1, RA 9160.)

OVERVIEW OF THE RECENT AMENDMENTS AS INTRODUCED BY RA 10365 TO AMLA OF 2001 (RA 9160) CATEGORY (Based on Bar 2014 Syllabus) COVERED INSTITUTION

RA 9160, as amended by RA 9194 and 10167

NOTE: Covered “Institutions” was changed to Covered “Persons”

Covered institution refers to: (1) banks, non-banks, quasi-banks, trust entities, and all other institutions and their subsidiaries and affiliates supervised or regulated by the Bangko Sentral ng Pilipinas (BSP); (2) Insurance companies and all other institutions supervised or regulated by the Insurance Commission; and (3)

RA 10365, amending RA 9160 (Amendments and New Provisions)

(i) securities dealers, brokers, salesmen, investment houses and other similar entities managing securities or rendering services as investment agent, advisor, or consultant, (ii) mutual funds, close and investment companies, common trust funds, pre-need companies and other similar entities, (iii) foreign exchange corporations, money changers, money payment, remittance, and transfer companies and other similar entities, and (iv) other entities administering or

333

Covered persons, natural or juridical, refer to: (1) banks, non-banks, quasi-banks, trust entities, foreign exchange dealers, pawnshops, money changers, remittance and transfer companies and other similar entities and all other persons and their subsidiaries and affiliates supervised or regulated by the Bangko Sentral ng Pilipinas (BSP); (2) insurance companies, pre-need companies and all other persons supervised or regulated by the Insurance Commission (IC); (3) (i) securities dealers, brokers, salesmen, investment houses and other similar persons managing securities or rendering services as investment agent, advisor, or consultant, (ii) mutual funds, close-end investment companies, common trust funds, and UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW otherwise dealing in currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes and other similar monetary instruments or property supervised or regulated by Securities and Exchange Commission.

other similar persons, and (iii) other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes and other similar monetary instruments or property supervised or regulated by the Securities and Exchange Commission (SEC); (4) jewelry dealers in precious metals, who, as a business, trade in precious metals, for transactions in excess of One million pesos (P1,000,000.00); (5) jewelry dealers in precious stones, who, as a business, trade in precious stones, for transactions in excess of One million pesos (P1,000,000.00); (6) company service providers which, as a business, provide any of the following services to third parties: (i) acting as a formation agent of juridical persons; (ii) acting as (or arranging for another person to act as) a director or corporate secretary of a company, a partner of a partnership, or a similar position in relation to other juridical persons; (iii) providing a registered office, business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement; and (iv) acting as (or arranging for another person to act as) a nominee shareholder for another person; and (7) persons who provide any of the following services: (i) managing of client money, securities or other assets; (ii) management of bank, savings or securities accounts; (iii) organization of contributions for the creation, operation or management of companies; and (iv) creation, operation or management of juridical persons or arrangements, and buying and selling business entities.

UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

334

SPECIAL LAWS Exclusions: The term ‘covered persons’ shall exclude lawyers and accountants Requisites for exclusion

OBLIGATIONS OF COVERED INSTITUTIONS

a. Customer Identification - Covered institutions shall establish and record the true identity of its clients based on official documents. They shall maintain a system of verifying the true identity of their clients and, in case of corporate clients, require a system of verifying their legal existence and organizational structure, as well as the authority and identification of all persons purporting to act on their behalf.

The provisions of existing laws to the contrary notwithstanding, anonymous accounts, accounts under fictitious names, and all other similar accounts shall be absolutely prohibited. Peso and foreign currency non-checking numbered accounts shall be allowed. The BSP may conduct annual testing solely limited to the determination of the existence and true identity of the owners of such accounts.

b) Record Keeping - All records of all transactions of covered institutions shall be maintained and safely stored for five (5) years from the date of transactions. With respect to closed accounts, the records on customer identification, account files and business correspondence, shall be preserved and safety stored for at least five (5) years from the dates when they were closed.

1. Acting as independent legal professionals 2. In relation to information concerning their clients or 3. Where disclosure of information would compromise client confidences or the attorney-client relationship. (Sec. 1, RA 10365, amending Sec. 3[a] of RA 9160). a. (same; not amended) b. (same; not amended) c. Reporting of Covered and Suspicious Transactions. – Covered persons shall report to the AMLC all covered transactions and suspicious transactions within five (5) working days from occurrence thereof, unless the AMLC prescribes a different period not exceeding fifteen (15) working days. “Lawyers and accountants acting as independent legal professionals are not required to report covered and suspicious transactions if the relevant information was obtained in circumstances where they are subject to professional secrecy or legal professional privilege. “x x x “x x x “When reporting covered or suspicious transactions to the AMLC, covered persons and their officers and employees are prohibited from communicating, directly or indirectly, in any manner or by any means, to any person or entity, the media, the fact that a covered or suspicious transaction has been reported or is about to be reported, the contents of the report, or any other information in relation thereto. Neither may such reporting be published or aired in any manner or form by the mass media”, electronic mail, or other similar devices. In case of violation thereof, the concerned officer and employee of the covered person and media shall be held criminally liable.”(Sec. 7, RA 10365 amending Sec. 9, RA 9160).

c) Reporting of Covered and Suspicious Transactions - Covered institutions shall

335

UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW report to the AMLC all covered transactions and suspicious transactions within five(5) working days from occurrences thereof, unless the Supervising Authority prescribes a longer period not exceeding ten (10) working days. "Should a transaction be determined to be both a covered transaction and a suspicious transaction, the covered institution shall be required to report the same as a suspicious transaction. When reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees shall not be deemed to have violated Republic Act No. 1405, as amended, Republic Act No. 6426, as amended, Republic Act No. 8791 and other similar laws, but are prohibited from communicating, directly or indirectly, in any manner or by an means, to any person, the fact that a covered or suspicious transaction report was made, the contents thereof, or any other information in relation thereto. In case of violation thereof, the concerned officer and employee of the covered institution shall be criminally liable. However, no administrative, criminal or civil proceedings, shall lie against any person for having made a covered or suspicious transaction report in the regular performance of his duties in good faith, whether or not such reporting results in any criminal prosecution under this Act of any other law. "When reporting covered or suspicious transactions to the AMLC, covered instituting and their officers and employees are prohibited from communicating directly or indirectly, in any manner or by any means, to any person or entity, the media, the fact that a covered or suspicious transaction report was made, the contents thereof, or any other information in relation thereto. Neither may such reporting be published or aired in any manner or form by the mass media, electronic mail, or other similar devices. In case of violation thereof, the concerned officer and employee of the covered institution and media shall be held criminally liable (Sec. 9, RA 9160 as amended by RA 9194). UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

336

SPECIAL LAWS COVERED TRANSACTIONS

SUSPICIOUS TRANSACTIONS

'Covered transaction' is a transaction in cash or other equivalent monetary instrument involving a total amount in excess of Five hundred thousand pesos (PhP 500,000.00) within one (1) banking day.(Sec. 3 [b], RA 9160). 'Suspicious transaction' are transactions with covered institutions, regardless of the amounts involved, where any of the following circumstances exist: 1. There is no underlying legal or trade obligation, purpose or economic justification; 2. The client is not properly identified; 3. The amount involved is not commensurate with the business or financial capacity of the client; 4. Taking into account all known circumstances, it may be perceived that the client's transaction is structured in order to avoid being the subject of reporting requirements under the Act; 5. Any circumstances 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 transactions is in a way related to an unlawful activity or offense under this Act that is about to be, is being or has been committed; or 7. Any transactions that is similar or analogous to any of the foregoing." (Sec. 3[b-1], RA 9160).

WHEN IS MONEY LAUNDERING COMMITTED (DEFINITION OF MONEY LAUNDERING)

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 transacts 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 falicitates the offense of money laundering referred to in paragraph (a)

337

Same; not amended

Same; not amended

Money laundering is committed by any person who, knowing that any monetary instrument or property represents, involves, or relates to the proceeds of any unlawful activity: (a) transacts said monetary instrument or property; (b) converts, transfers, disposes of, moves, acquires, possesses or uses said monetary instrument or property; (c) conceals or disguises the true nature, source, location, disposition, movement or ownership of or rights with respect to said monetary instrument or property; (d) attempts or conspires to commit money laundering offenses referred to in UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW

UNLAWFUL ACTIVITIES OR PREDICATE CRIMES

above.

paragraphs (a), (b) or (c);

(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."(Sec. 4, RA 9160, as amended by RA 9194).

(e) aids, abets, assists in or counsels the commission of the money laundering offenses referred to in paragraphs (a), (b) or (c) above; and (f) performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in paragraphs (a), (b) or (c) above.

'Unlawful activity' refers to any act or omission or series or combination thereof involving or having direct relation to following:

“Money laundering is also committed by any covered person who, knowing that a covered or suspicious transaction is required under this Act to be reported to the Anti-Money Laundering Council (AMLC), fails to do so.” (Sec. 4, RA 10365, amending Sec. 4, RA 9160). ‘Unlawful activity’ refers to any act or omission or series or combination thereof involving or having direct relation to the following:

(1) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended;

(1) Kidnapping for ransom under Article 267 of Act No. 3815, otherwise known as the Revised Penal Code, as amended;

(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16 of Republic Act No. 9165, otherwise known as the Comprehensive Dangerous Act of 2002;

(2) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of Republic Act No. 9165, otherwise known as the Comprehensive Dangerous Drugs Act of 2002;

(3) Section 3 paragraphs B, C, E, G, H and I of republic Act No. 3019, as amended, otherwise known as the Anti-Graft and Corrupt Practices Act; (4) Plunder under Republic Act No. 7080, as amended; (5) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised Penal Code, as amended; (6) Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602; (7) Piracy on the high seas under the Revised Penal Code, as amended and Presidential under the Revised Penal Code, as amended and Presidential Decree No. 532; (8) Qualified theft under Article 310 of the UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

338

(3) Section 3 paragraphs B, C, E, G, H and I of Republic Act No. 3019, as amended, otherwise known as the Anti-Graft and Corrupt Practices Act; (4) Plunder under Republic Act No. 7080, as amended; (5) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised Penal Code, as amended; (6) Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602; (7) Piracy on the high seas under the Revised Penal Code, as amended and Presidential Decree No. 532; (8) Qualified theft under Article 310 of the Revised Penal Code, as amended;

SPECIAL LAWS Revised penal Code, as amended; (9) Swindling under Article 315 of the Revised Penal Code, as amended; (10) Smuggling under Republic Act Nos. 455 and 1937; (11) Violations under Republic Act No. 8792, otherwise known as the Electrinic Commerce Act of 2000; (12) Hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended, including those perpetrated by terrorists against non-combatant persons and similar targets; (13) Fraudulent practices and other violations under Republic Act No. 8799, otherwise known as the Securities Regulation Code of 2000; (14) Felonies or offenses of a similar nature that are punishable under the penal laws of other countries."

(9) Swindling under Article 315 and Other Forms of Swindling under Article 316 of the Revised Penal Code, as amended; (10) Smuggling under Republic Act Nos. 455 and 1937; (11) Violations of Republic Act No. 8792, otherwise known as the Electronic Commerce Act of 2000; (12) Hijacking and other violations under Republic Act No. 6235; destructive arson and murder, as defined under the Revised Penal Code, as amended; (13) Terrorism and conspiracy to commit terrorism as defined and penalized under Sections 3 and 4 of Republic Act No. 9372; (14) Financing of terrorism under Section 4 and offenses punishable under Sections 5, 6, 7 and 8 of Republic Act No. 10168, otherwise known as the Terrorism Financing Prevention and Suppression Act of 2012: (15) Bribery under Articles 210, 211 and 211-A of the Revised Penal Code, as amended, and Corruption of Public Officers under Article 212 of the Revised Penal Code, as amended; (16) Frauds and Illegal Exactions and Transactions under Articles 213, 214, 215 and 216 of the Revised Penal Code, as amended; (17) Malversation of Public Funds and Property under Articles 217 and 222 of the Revised Penal Code, as amended; (18) Forgeries and Counterfeiting under Articles 163, 166, 167, 168, 169 and 176 of the Revised Penal Code, as amended; (19) Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise known as the Anti-Trafficking in Persons Act of 2003; (20) Violations of Sections 78 to 79 of Chapter IV, of Presidential Decree No. 705, otherwise known as the Revised Forestry Code of the Philippines, as amended; (21) Violations of Sections 86 to 106 of Chapter VI, of Republic Act No. 8550,

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MERCANTILE LAW otherwise known as the Philippine Fisheries Code of 1998; (22) Violations of Sections 101 to 107, and 110 of Republic Act No. 7942, otherwise known as the Philippine Mining Act of 1995; (23) Violations of Section 27(c), (e), (f), (g) and (i), of Republic Act No. 9147, otherwise known as the Wildlife Resources Conservation and Protection Act; (24) Violation of Section 7(b) of Republic Act No. 9072, otherwise known as the National Caves and Cave Resources Management Protection Act; (25) Violation of Republic Act No. 6539, otherwise known as the Anti-Carnapping Act of 2002, as amended; (26) Violations of Sections 1, 3 and 5 of Presidential Decree No. 1866, as amended, otherwise known as the decree Codifying the Laws on Illegal/Unlawful Possession, Manufacture, Dealing In, Acquisition or Disposition of Firearms, Ammunition or Explosives; (27) Violation of Presidential Decree No. 1612, otherwise known as the Anti-Fencing Law; (28) Violation of Section 6 of Republic Act No. 8042, otherwise known as the Migrant Workers and Overseas Filipinos Act of 1995, as amended by Republic Act No. 10022; (29) Violation of Republic Act No. 8293, otherwise known as the Intellectual Property Code of the Philippines; (30) Violation of Section 4 of Republic Act No. 9995, otherwise known as the Anti-Photo and Video Voyeurism Act of 2009; (31) Violation of Section 4 of Republic Act No. 9775, otherwise known as the Anti-Child Pornography Act of 2009; (32) Violations of Sections 5, 7, 8, 9, 10(c), (d) and (e), 11, 12 and 14 of Republic Act No. 7610, otherwise known as the Special Protection of Children Against Abuse, Exploitation and Discrimination; UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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SPECIAL LAWS (33) Fraudulent practices and other violations under Republic Act No. 8799, otherwise known as the Securities Regulation Code of 2000; and (34) Felonies or offenses of a similar nature that are punishable under the penal laws of other countries. ANTI-MONEY LAUNDERING COUNCIL (AMLC)

FUNCTIONS

The Anti-Money Laundering Council is hereby created and shall be composed of 1. The Governor of the Bangko Sentral ng Pilipinas as Chairman, 2. The Commissioner of the Insurance Commission and 3. The Chairman of the Securities and Exchange Commission as members. (Sec. 7, RA 9160, as amended by RA 9194). The AMLC shall shall act unanimously in the discharge of its functions as defined hereunder:

Same; not amended

The AMLC shall act unanimously in the discharge of its functions as defined hereunder:

(1) to require and receive covered or suspicious transaction reports from covered institutions;

(1) (Same; not amended.)

(2) to issue orders addressed to the appropriate Supervising Authority or the covered institutions to determine the true identity of the owner of any monetary instrument or preperty subject of a covered transaction or suspicious transaction report or request for assistance from a foreign State, or believed by the Council, on the basis fo substantial evidence, to be, in whole or in part, wherever located, representing, involving, or related to directly or indirectly, in any manner or by any means, the proceeds of an unlawful activity.

(3) (Same; not amended.)

(3) to institute civil forfeiture proceedings and all other remedial proceedings through the Office of the Solicitor General; (4) to cause the filing of complaints with the Department of Justice or the Ombudsman for the prosecution of money laundering offenses; (5) to investigate suspicious transactions and covered transactions deemed suspicious after an investigation by AMLC, money laundering activities and other violations of this Act;

341

(2) (Same; not amended.)

(4) (Same; not amended.) (5) (Same; not amended.) (6) to apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument or property alleged to be laundered, proceeds from, or instrumentalities used in or intended for use in any unlawful activity as defined in Section 3(i) hereof; (7) (Same; not amended.) (8) (Same; not amended.) (9) (Same; not amended.) (10) (Same; not amended.) (11) (Same; not amended.) (12) to require the Land Registration Authority and all its Registries of Deeds to submit to the AMLC, reports on all real estate transactions involving an amount in excess of Five hundred thousand pesos (P500,000.00) within fifteen (15) days from UNIVERSITY OF SANTO TOMAS FACULTY OF CIVIL LAW

MERCANTILE LAW (6) to apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument or property alleged to be the proceeds of any unlawful activity as defined in Section 3(i) hereof; (7) to implement such measures as may be necessary and justified under this Act to counteract money laundering;

the date of registration of the transaction, in a form to be prescribed by the AMLC. The AMLC may also require the Land Registration Authority and all its Registries of Deeds to submit copies of relevant documents of all real estate transactions (Sec. 6, RA 10365 amending Sec. 7, RA 9160).

(8) to receive and take action in respect of, any request from foreign states for assistance in their own anti-money laundering operations provided in this Act; (9) to develop educational programs on the pernicious effects of money laundering, the methods and techniques used in the money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders; (10) to enlist the assistance of any branch, department, bureau, office, agency, or instrumentality of the government, including government-owned and -controlled corporations, in undertaking any and all anti-money laundering operations, which may include the use of its personnel, facilities and resources for the more resolute prevention, detection, and investigation of money laundering offenses and prosecution of offenders; and

FREEZING OF MONEY INSTRUMENT OR PROPERTY

(11) to impose administrative sanctions for the violation of laws, rules, regulations, and orders and resolutions issued pursuant thereto. (Sec. 7, RA 9160 as amended by RA 9194.) Upon verified ex parte petition by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity as defined in Section 3(i) hereof, the Court of Appeals may issue a freeze order, which shall be effective immediately. The freeze order shall be for a period of twenty (20) days unless extended by the court. In any case, the court should act on the petition to freeze within twenty-four (24) hours from filing of the petition. If the application is filed a day before a nonworking day, the computation of the twenty-four (24)-hour period shall exclude

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Upon a verified ex parte petition by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity as defined in Section 3(i) hereof, the Court of Appeals may issue a freeze order which shall be effective immediately, and which shall not exceed six (6) months depending upon the circumstances of the case: Provided, That if there is no case filed against a person whose account has been frozen within the period determined by the court, the freeze order shall be deemed ipso facto lifted: Provided, further, That this new rule shall not apply to pending cases in the courts. In any case, the court should act on the petition to freeze

SPECIAL LAWS the nonworking days." "A person whose account has been frozen may file a motion to lift the freeze order and the court must resolve this motion before the expiration of the twenty (20)-day original freeze order." "No court shall issue a temporary restraining order or a writ of injunction against any freeze order, except the Supreme Court. (Sec. 10, RA 9160 as amended by RA 10167.)

AUTHORITY TO INQUIRE INTO BANK DEPOSITS

Notwithstanding the provisions of Republic Act No. 1405, as amended; Republic Act No. 6426, as amended; Republic Act No. 8791; and other laws, the AMLC may inquire into or examine any particular deposit or investment, including related accounts, with any banking institution or non-bank financial institution upon order of any competent court based on an ex parte application in cases of violations of this Act, when it has been established that there is probable cause that the deposits or investments, including related accounts involved, are related to an unlawful activity as defined in Section 3(i) hereof or a money laundering offense under Section 4 hereof; except that no court order shall be required in cases involving activities defined in Section 3(i)(1), (2), and (12) hereof, and felonies or offenses of a nature similar to those mentioned in Section 3(i)(1), (2), and (12), which are Punishable under the penal laws of other countries, and terrorism and conspiracy to commit terrorism as defined and penalized under Republic Act No. 9372.

within twenty-four (24) hours from filing of the petition. If the application is filed a day before a nonworking day, the computation of the twenty-four (24)-hour period shall exclude the nonworking days. A person whose account has been frozen may file a motion to lift the freeze order and the court must resolve this motion before the expiration of the freeze order. No court shall issue a temporary restraining order or a writ of injunction against any freeze order, except the Supreme Court. (Sec. 8, RA 10365, amending RA 9160.)

Same; but the following new provisions were inserted: Nothing contained in this Act nor in related antecedent laws or existing agreements shall be construed to allow the AMLC to participate in any manner in the operations of the BIR. (Sec. 20, RA 10365, amending RA 9160.) The authority to inquire into or examine the main account and the related accounts shall comply with the requirements of Article III, Sections 2 and 3 of the 1987 Constitution, which are hereby incorporated by reference. Likewise, the constitutional injunction against ex post factolaws and bills of attainder shall be respected in the implementation of this Act.(Sec. 21, RA 10365 amending RA 9160.)

The Court of Appeals shall act on the application to inquire into or examine any deposit or investment with any banking institution or non-bank financial institution within twenty-four (24) hours from filing of the application. To ensure compliance with this Act, the Bangko Sentral ng Pilipinas may, in the course of a periodic or special examination, check the compliance of a Covered institution with the requirements of the AMLA and its implementing rules and regulations.

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MERCANTILE LAW For purposes of this section, ‘related accounts’ shall refer to accounts, the funds and sources of which originated from and/or are materially linked to the monetary instrument(s) or property(ies) subject of the freeze order(s). A court order ex parte must first be obtained before the AMLC can inquire into these related Accounts: Provided, That the procedure for the ex parte application of the ex parte court order for the principal account shall be the same with that of the related accounts. "The authority to inquire into or examine the main account and the related accounts shall comply with the requirements of Article III, Sections 2 and 3 of the 1987 Constitution, which are hereby incorporated by reference (Sec. 11, RA 9160, as amended by RA 10167). Safe Harbor Provision

when the proceeds of an "unlawful activity," like jueteng operations, are made to appear as having originated from legitimate sources. Money laundering crime is separate from the unlawful activity of being a jueteng operator, and requires no previous conviction for the unlawful activity (Sec. 4, RA 9160, as amended by RA 10365).

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.

Jurisdiction for violations of AMLA

The report to AMLC will not violate the law on Secrecy of Bank Deposits, Foreign Currency Deposit Act and General Banking Law

1. RTC – all cases on money laundering 2. Sandiganbayan – Those committed by public officers and private persons in conspiracy with them. (Sec. 5 R.A. 9160, as amended)

The report to AMLC will not violate the law on Secrecy of Bank Deposits, Foreign Currency Deposit Act and General Banking Law but it cannot otherwise communicate to any person or media, fact of report of covered transaction or contents of the said report nor can the fact of reporting be published or aired in mass media, electronic mail or similar devices (Sec. 11, RA 9160 as amended by RA 10167).

Party entitled to file freeze order The AMLC, through the OSG, may file an ex-parte verified petition for freeze order on any monetary instrument, property or proceeds relating to or involving an unlawful activity. Jurisdiction to issue a freeze order

Q: Alvin is jobless but is reputed to be a jueteng operator. He has never been charged or convicted of any crime. He maintains several bank accounts amounting to P100 Million. AMLC charged Alvin with violation of the Anti-Money Laundering Law. Can Alvin move to dismiss the case on the ground that he has no criminal record?

It is solely the CA which has the authority to issue a freeze order upon application ex parte by the AMLC and after determination that probable cause exists. It also has the exclusive jurisdiction to extend existing freeze orders previously issued by the AMLC vis-à-vis accounts and deposits related to money-laundering activities. (Republic v. Cabrini Green & Ramos, G.R. No. 154522, May 5, 2006)

A: No. The contention of Alvin is not tenable because under AMLA, "money laundering crime" committed UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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SPECIAL LAWS Probable cause under AMLA Probable cause includes such facts and circumstances which would lead a reasonably discreet, prudent or cautious man to believe that an unlawful activity and/or a money laundering offense is about to be, is being or has been committed and that the account or any monetary instrument or property subject thereof sought to be frozen is in any way related to said unlawful activity and/or money laundering offense. (Rule 10.2 of R.A. 9194 as amended) Period of effectivity of freeze orders Freeze orders shall be effective for period not exceeding 6 months depending upon the circumstances (Sec. 10, RA 9160 as amended by RA 10365). Related accounts Those accounts, the funds and sources of which originated from and/or are materially linked to the monetary instrument or property subject of the freeze order. Instances when the Anti-Money Laundering Council (AMLC) may inquire into bank deposits GR: Only upon order of any competent court in cases of violation of R.A. 9160, as amended. XPNs: No need of court order in cases of (KHDAM) 1. Kidnapping, 2. Hijacking, 3. Drugs- violation of Dangerous Drugs Act, 4. Arson, 5. Murder. (Sec. 11 R.A. 9160, as amended)

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MERCANTILE LAW FOREIGN INVESTMENTS ACT

and appraise the value of such assets other than foreign exchange.

POLICY OF THE LAW “Doing Business” in the Philippines State policy of the law (NOSE Part) “Doing Business” in the Philippines 1. It is the policy of the State to attract, promote and welcome productive investments in activities which significantly contribute to National industrialization and socio-economic development to the extent that foreign investment is allowed in such activity by the Constitution and relevant laws from: a. Foreign individuals; b. Partnerships; c. Corporations; d. Governments, including their political subdivisions. 2. Foreign investments shall be encouraged in the enterprises that significantly expand livelihood and employment Opportunities for Filipinos by: a. Enhancing economic value of farm products; b. Promoting the welfare of Filipino consumers; c. Expanding the scope, quality and volume of exports and their access to foreign markets; d. And/or transferring relevant technologies in agriculture, industry and support services. 3. Foreign investments shall be welcome as a Supplement to Filipino capital and technology in those enterprises serving mainly the domestic market. 4. GR: There are no restrictions on extent of foreign ownership of Export enterprises. In domestic market enterprises, foreigners can invest as much as 100% equity XPN: In areas included in the negative list. 5. Foreign-owned firms catering mainly to the domestic market shall be encouraged to undertake measures that will gradually increase Filipino PARTicipation in their businesses by a. Taking in Filipino partners; b. Electing Filipinos to the board of director; c. Implementing transfer of technology to Filipinos; d. Generating more employment for the economy; and e. Enhancing skills of Filipino workers (Sec. 2, RA 7042).

Foreign corporations are considered “doing or transacting business” in the Philippines if they are: 1. Soliciting orders, service contracts, and opening offices whether called liason offices of branches; 2. Appointing representatives, distributors domiciled in the Philippines or who stay for a period or periods totaling 180 days or more; 3. Participating in the management, supervision or control of any domestic business, firm, entity, or corporation in the Philippines; 4. Doing any act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and object of its organization.(Sec 3 [d], R.A. 7042.) Instances that are considered as “not doing or transacting business” in the Philippines for foreign corporations 1. Mere investment as shareholder and exercise of rights as investor; 2. Having a nominee director or officer to represent its interest in the corporation; 3. Appointing a representative or distributor which transacts business in its own name and for its own account; 4. Publication of a general advertisement through any print or broadcast media; 5. Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; 6. Consignment by the foreign corporation of equipment with a local company to be used in the processing of products for export; 7. Collecting information in the Philippines; Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis (Sec 3 [d], RA 7042).

DEFINITION OF TERMS Foreign Investment It is an equity investment made by non-Philippine national in the form of foreign exchange and/or other assets actually transferred to the Philippines and duly registered with the Central Bank which shall assess UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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SPECIAL LAWS Export Enterprise

single proprietorship for it to do business or invest in a domestic enterprise up to 100% of its capital. 2. The participation of non-Philippine national in the enterprise is must not be prohibited or limited to a smaller percentage by existing law and/ or under Foreign Investment Negative list (Sec. 5, RA 7042).

It is an enterprise wherein a manufacturer, processor or service [including tourism] enterprise exports sixty percent (60%) or more of its output, or wherein a trader purchases products domestically and exports sixty per cent (60%) or more of such purchases (Sec 3 [e], RA 7042). Domestic Market Enterprise

Imposition of additional limitation on the extent of foreign ownership in an enterprise other than those provided for under RA 7042 by the SEC or BTRCP

It is an enterprise which produces goods for sale, or renders services to the domestic market entirely or if exporting a portion of its output fails to consistency export at least 60% thereof (Sec 3 [f], R.A. 7042).

GR: The SEC or BTRCP, as the case may be, shall not impose any limitations on the extent of foreign ownership in an enterprise additional to those provided in R.A. 7042.

REGISTRATION OF INVESTMENTS OF NON-PHILIPPINE NATIONALS

XPNs: 1. That any enterprise seeking to avail of incentives under the Omnibus Investment Code of 1987 must apply for registration with the Board of Investments (BOI), which shall process such application for registration in accordance with the criteria for evaluation prescribed in said Code; 2. That a non-Philippine national intending to engage in the same line of business as an existing joint venture, in which he or his majority shareholder is a substantial partner, must disclose the fact and the names and addresses of the partners in the existing joint venture in his application for registration with the SEC.

Philippine nationals 1. A citizen of the Philippines; 2. A domestic partnership or association wholly owned by citizens of the Philippines; 3. Corporations organized under Philippine laws of which 60% of the capital stock outstanding and entitled to vote is owned and held by Filipino citizens; 4. Corporations organized abroad and registered as doing business in the Philippines under the Corporation Code of which 100% of the capital stock entitled to vote belong to Filipinos; and 5. Trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty (60%) of the fund will accrue to the benefit of the Philippine nationals.

FOREIGN INVESTMENT IN EXPORT ENTERPRISES Rules regarding foreign registration in export enterprises 1. Foreign investment in export enterprises whose products and services do not fall within Lists A and B of the Foreign Investment Negative List is allowed up to 100% ownership. 2. Export enterprises which are non-Philippine nationals shall register with BOI and submit the reports that may be required to ensure continuing compliance of the export enterprise with its export requirement. 3. BOI shall advise SEC or BTRCP, as the case may be, of any export enterprise that fails to meet the export ratio requirement. 4. The SEC or BTRCP shall thereupon order the non-complying export enterprise to reduce its sales to the domestic market to not more than 40% of its total production; failure to comply with such SEC or BTRCP order, without justifiable reason, shall subject the enterprise to cancellation of SEC or BTRCP registration, and/or the penalties provided in this law (Sec 6, R.A. 7042).

Non-Philippine nationals Those who do not belong to the definition of a Philippine national. A non-Philippine national may own fully a domestic market enterprise A non-Philippine national may own up to 100% of a domestic market enterprise (Sec. 7, RA 7042). Requirements for a non-Philippine national to own up to 100% of a domestic market enterprise 1. A non-Philippine national must register with the SEC or with the Bureau of Trade Regulation and Consumer Protection (BTRCP) of DTI in the case of

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MERCANTILE LAW 100% Filipino Owned (Zero percent (0%) foreign equity)

FOREIGN INVESTMENT IN EXPORT ENTERPRISES

(Code: CoFi AMMaN Co. – ProMiSe- US$2.5M)

Rules regarding foreign registration in export enterprises

9. COoperatives (Art. 26, Ch. III, R.A. 6938); 10. Manufacture of FIrecrackers and other pyrotechnic devices (Sec. 5, R.A. 7183). 11. Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons and Anti-personnel mines (Various treaties to which the Philippines is a signatory and conventions supported by the Philippines). 12. Mass media except recording 13. Utilization of MArine resources (Sec. 2, Art. XII, Constitution); 14. Manufacture, repair, stockpiling and/or distribution of Nuclear weapons (Sec. 8, Art. II, Constitution); 15. COckpits (Sec. 5, P.D. 449); 16. Practice of all PROfessions 1. Law 2. Medicine and allied professions 3. Accountancy, etc. 17. Small-scale MIning (Sec. 3, R.A. 7076); 18. Private SEcurity agencies (Sec. 4, R.A. 5487); 19. Retail trade enterprises with paid-up capital of less than US$2.5 M (Sec. 5, R.A. 8762);

5. Foreign investment in export enterprises whose products and services do not fall within Lists A and B of the Foreign Investment Negative List is allowed up to 100% ownership. 6. Export enterprises which are non-Philippine nationals shall register with BOI and submit the reports that may be required to ensure continuing compliance of the export enterprise with its export requirement. 7. BOI shall advise SEC or BTRCP, as the case may be, of any export enterprise that fails to meet the export ratio requirement. 8. The SEC or BTRCP shall thereupon order the non-complying export enterprise to reduce its sales to the domestic market to not more than 40% of its total production; failure to comply with such SEC or BTRCP order, without justifiable reason, shall subject the enterprise to cancellation of SEC or BTRCP registration, and/or the penalties provided in this law (Sec 6, R.A. 7042). FOREIGN INVESTMENT DOMESTIC MARKET ENTERPRISES A domestic market enterprise may change its status to export enterprise if the Domestic market enterprise consistently exports in each year thereof sixty per cent (60%) or more of its output over a three (3) year period (Sec. 7, RA 7042).

80 % Filipino Owned (Up to twenty percent (20%) foreign equity) (Code: Prc)

FOREIGN INVESTMENT NEGATIVE LIST Foreign Investment Negative List

1.

It is a list of areas of economic activity whose foreign ownership is limited to a maximum of 40% of the equity capital of the enterprises engaged therein (Sec. 3 [g], RA 7042).

Private Radio Communications network (R.A. 3846).

75 % Filipino Owned (Up to twenty percent (25%) foreign equity) (Code: LoRD F)

List A of the Foreign Investment Negative List 1. Contracts for the construction and repair of LOcally-funded public works (Sec. 1, CA 541, LOI 630) except: 3. infrastructure/development projects covered in R.A. 7718; and 4. projects which are foreign funded or assisted and required to undergo international competitive bidding (Sec. 2[a], R.A. 7718);

Filipino Ownership must be: (CODES are as follows) 1. 100% - CoFi AMMaN Co.- ProMiSe -US$2.5M 2. 80% - Prc 3. 75% - LoRD 4. 70% - Ad 5. 60% - Go LEARN CUPID 6. 40% - FI (SEC)

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SPECIAL LAWS 2. Private Recruitment, whether for local or overseas employment (Art. 27, P.D. 442); 3. Contracts for the construction of Defense-related structures (Sec. 1, CA 541). 4. Under the Flag Law, in the purchase of articles for the Government, preference shall be given to materials and supplies produced, made, or manufactured in the Philippines, and to domestic entites. Domestic entites means any citizen of the Philippines or commercial company at least 75% of the capital of which is owned by citizens of the Philippines (Sec. 1, CA 138)

5. Culture, production, milling, processing, trading excepting retailing, of rice and corn and acquiring, by barter, purchase or otherwise, Rice and corn and the by-products thereof (Sec. 5, P.D. 194); 6. Exploration, development and utilization of Natural resources (Sec. 2, Art. XII, Constitution); 7. Ownership of Condominium units where the common areas in the condominium project are co-owned by the owners of the separate units or owned by a corporation (Sec. 5, R.A. 4726). 8. Operation and management of public Utilities (Sec. 11, Art. XII, Constitution; Sec. 16, CA 146); 9. Project Proponent and Facility Operator of a BOT project requiring a public utilities franchise (Sec. 11, Art. XII, Constitution; Sec. 2a, R.A. 7718); 10. Manufacture, repair, storage and/ or distribution of products/ Ingredients requiring PNP clearance (R.A. 7042 as amended by R.A. 8179); 11. Operation of Deep sea commercial fishing vessel (Sec. 27, R.A. 8550); 12. Corporations engaged in Coastwise shipping (Sec. 806, P.D. 1464)

70 % Filipino Owned (Up to twenty percent (30%) foreign equity) (Code: AdPawn) 1. Advertising (Art. XVI, Constitution) 2. Corporations engaged in pawnshop business (Sec. 8, P.D. 114) 60 % Filipino Owned (Up to twenty percent (40%) foreign equity) (Code: Go LEARN CUPIDCo) 1. Contracts for the supply of materials, goods and commodities to GOCC, agency or municipal corporation (Sec. 1, R.A. 5183); 2. Ownership of private Lands (Sec. 7, Art. XII, Constitution; Sec. 22, Ch. 5, CA 141; Sec. 4, R.A. 9182); 3. Ownership/establishment and administration of Educational institutions (Sec. 4, Art. XIV, Constitution); 4. Adjustment Companies (Sec. 323, P.D. 613);

40 % Filipino Owned (Up to twenty percent (60%) foreign equity) (Code: FI [SEC] ) 1. Financing companies regulated by the SEC (Sec. 6, R.A. 5980 as amended by R.A. 8556); 2. Investment houses regulated by the SEC (Sec. 5, P.D. 129 as amended by R.A. 8366).

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MERCANTILE LAW a. It is a list of business activities or enterprises in the Philippines that foreigners are disqualified to engage in. b. It is a list of business activities or enterprises in the Philippines that foreigners are qualified to engage in. c. It is a list of business activities or enterprises that are open to foreign investments provided it is with the approval of the Board of Investment. d. It is a list of business activities or enterprises that are open to foreign investments provided it is with the approval of the Securities and Exchange Commission.

List B of the Foreign Investment Negative List 1. GR: Defense-related activities, requiring prior clearance and authorization from the Department of National Defense to engage in such activity, such as the : a. Manufacture b. Repair c. Storage d. Distribution of, firearms, ammunition, lethal weapons, military ordnance, explosives, pyrotechnics, similar materials XPN: Such manufacturing or repair activity is specifically authorized, with a substantial export component, to a non-Philippine national by the Secretary of National Defense; or 2. Those that have implications on public health and morals, such as the manufacture and distribution of: a. Dangerous drugs b. All forms of gambling c. Nightclubs d. Bars e. Beer houses f. Dance halls g. Sauna and steam bathhouses h. Massage clinics. (Sec. 8, RA 7042.)

A: A. It is a list of business activities or enterprises in the Philippines that foreigners are disqualified to engage in. Strategic industries Industries that are characterized by all of the following: a. Crucial to the accelerated industrialization of the country. b. Require massive capital investments to achieve economies of scale for efficient operations. c. Require highly specialized or advanced technology which necessitates technology transfer and proven production techniques in operations; d. Characterized by strong backward and forward linkages with most industries existing in the country, and e. Generate substantial foreign exchange savings through import substitution and collateral foreign exchange earnings through export of part of the output that will result with the establishment, expansion or development of the industry.

NOTE: There is no significant difference between List A and List B.

Rule regarding small and medium-sized domestic market enterprises GR: Small and medium-sized domestic market enterprises with paid-in equity capital less than the equivalent of US$200,000.00, are reserved to Philippine nationals. XPNs: 1. They involve advanced technology as determined by the DOST; 2. They employ at 50 direct employees, then a minimum paid-in capital of US$100,000.00 (Sec. 8, RA 7042)

Penalties provided under R.A. 7042 1. A person who violates any provision of R.A. 7042 or of the terms and conditions of registration or of the rules and regulations issued pursuant thereto, or aids or abets in any manner any violation shall be subject to a fine not exceeding P100,000. 2. If the offense is committed by a juridical entity, it shall be subject to a fine in an amount not exceeding 1/2 of 1% of total paid-in capital but not more than P5,000,000.00 The president and/or officials responsible therefor shall also be subject to a fine not exceeding P200,000.00 3. In addition to the foregoing, any person, firm or juridical entity involved shall be subject to forfeiture of all benefits granted underR.A. 7042 (Sec 14, RA 7042).

List C of the Foreign Investment Negative List List C shall contain the areas of investment in which existing enterprises already serve adequately the needs of the economy and the consumer and do not require further foreign investments, as determined by NEDA and approved by the President and promulgated in a Presidential Proclamation. Q: The main feature of the Foreign Investment Act of 1991 is to introduce the concept of "Negative Lists". Under the said law, what is a "Negative List"? (2012 Bar Question) UNIVERSITY OF SANTO TOMAS 2014 GOLDEN NOTES

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Bouvier, J. (Revised 6th Ed.). (1856). Bouvier’s Law Dictionary. Philadelphia: Childs & Peterson De Leon, H.S. and De Leon, Jr., H.M. (Eds.). (2010). The Insurance Code of the Philippines, Annotated. Manila: Rex Bookstore, Inc.

Pineda, Ernesto L. (2010). Law on Property. Quezon City: Central Book Supply, Inc. Sundiang, J. R. Sr. & Aquino, T. (5th Ed.). (2011). Reviewer on Commercial Law. Manila: Rex Book Store.

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